Tesla's Self-Driving Problem
Sep. 16, 2021 7:15 AM ET Tesla, Inc. (TSLA)BIDU, BMWYY, BYDDY...683 Comments 40 Likes
Summary
Tesla is the EV leader and generates solid growth. But its car business is not worth $700+ billion.
Energy is a relatively small, money-losing franchise, which limits its value.
Markets are pricing in massive success in Tesla's AV franchise, but that is far from certain, and it looks like others are pulling ahead of Tesla.
Article Thesis
Tesla (NASDAQ:TSLA) is the leader in the EV space for now, but that alone doesn't justify the current market capitalization, I believe. Instead, the market prices in massive success in autonomous driving, before it has materialized. It does look like Tesla is not the leader in that space, and commercial success with robo-taxis is far from guaranteed and might be many years away.
EV Leadership - How Much Is It Worth?
Tesla has sold about 500,000 EVs in 2020, and the company seems to be on track for something in the ballpark of 850,000 EVs in 2021. This is a major feat for the company for sure, and the company undoubtedly deserves respect for coming close to selling a million cars in a single year.
Considering that Tesla was founded not too long ago, selling half as many cars as Mercedes-Benz (OTCPK:DDAIF), BMW (OTCPK:BAMXF), or Ford (F), which all have been around for many decades, is an accomplishment for sure. It is, however, not an accomplishment that justifies a market capitalization of $700+ billion, I believe, especially when we consider how other car companies are valued.
Let's look at Tesla's valuation relative to both major legacy car companies as well as a couple of other EV players:
Tesla vs. legacy car companies PS ratio
Data by YCharts
Tesla trades at 11x next year's expected revenue, while legacy players such as Ford, Daimler, and General Motors (GM) trade for 0.3x to 0.5x next year's expected revenue. In other words, Tesla's valuation is roughly 20x to 30x as high as that of legacy players in the premium segment, where Tesla is active today, and in the mass-market segment, where Tesla seeks to become a major player. To some degree, the valuation difference seems justified due to Tesla's higher growth, but a 2,000% premium seems irrationally high to me.
When we compare Tesla's valuation to that of some other EV pureplays, the company does, again, look quite pricy:
Tesla vs. EV pureplays PS ratio
Data by YCharts
At 11x forward revenue, Tesla trades at roughly twice the valuation its peers NIO (NIO), Li Auto (LI), and XPeng (XPEV) trade at - despite the fact that these are growing faster than Tesla, which should theoretically justify a higher valuation for NIO, LI, and XPEV. According to YCharts data, NIO, LI, and XPEV are forecasted to grow their sales by 141%, 123%, and 140%, respectively, between 2021 and 2023. The growth forecast for Tesla, meanwhile, is 70% for those two years combined, these other three EV pureplays do thus grow at roughly twice the rate Tesla grows at, and yet Tesla is the much more expensive stock.
Looking at BYD (OTCPK:BYDDY), the comparison is even more unfavorable for Tesla. BYD trades at just ~2.5x next year's expected revenue, which means that this EV pureplay trades at less than one-fourth of Tesla's valuation. One can argue that the EV industry as a whole is trading above fair value, but even if one does not agree with that statement, Tesla surely does look expensive relative to other EV pureplays on top of looking expensive relative to legacy car manufacturers.
This also holds true when we look at the next comparison, i.e. market cap versus EV vehicle sales. The following statistic shows the EV market share of the major players in H1 2021:
Global plug-in electric vehicle market share in 1H 2021
Source: statista.com
If we value the EV business units of Volkswagen (OTCPK:VWAGY), GM, and Stellantis (STLA) like Tesla is valued, then the values of these units would be $610 billion, $420 billion, and $320 billion, respectively. These amounts are way higher than the current market capitalizations of these three companies ($170 billion, $70 billion, and $60 billion, respectively).
Even if the value of the legacy businesses of these companies was zero, which would not make a lot of sense, as these companies still earn billions of dollars with gas-powered vehicles, these companies would have to trade at massive premiums relative to their current valuations based on the value of their EV businesses alone - if Tesla was valued correctly, which I believe is not true.
The comparison to other, higher-growth EV players and the comparison to the theoretical values of the EV franchises of legacy car companies shows that Tesla trades well ahead of the value of its EV business right now, I believe. The largest car company in the world, Toyota (NYSE:TM), is valued at around $250 billion today while selling around 10 million cars a year. Tesla trades at a market capitalization roughly three times that high, which implies annual sales in the 30 million range, all else equal. Sales this high will, in all likelihood, not be achievable for Tesla in the foreseeable future. Tesla undoubtedly has a healthy track record when it comes to growing its sales volumes in recent years, but at less than 1 million vehicles sold annually, it is still very far from reaching a size comparable to VW or Toyota, and yet it trades at a massively higher market cap.
So if the car business does not really justify the current valuation, where is the value coming from? Tesla's energy business remains comparatively small, with H1 revenue of ~$3 billion, and, importantly, the energy business remains unprofitable even on a gross profit basis, as company-wide gross profit in H1 was less than the company's automotive gross profit. When we further account for operating expenses related to the energy business, it can be reasonably concluded that this part of Tesla is deeply unprofitable for now, which means that it can't hold a lot of value.