- Tesla's current market cap in the $26 billion range not justified by current performance, including sales volume. Current bets are based on exponential growth, which is doubtful.
- The real story of exponential growth is in the low-cost vehicle category, as evidenced by Renault's Dacia brand performance, which offers cars for less than Tesla's current battery costs.
- Based on past experience such as with the hybrids, EV's will not sell more than a million units per year a decade from now, therefore Tesla is overvalued.
In 2013, Renault (OTC:RNSDF) sold 2.63 million cars. By comparison Tesla (NASDAQ:TSLA) sold 22,450 cars. The Chevy Volt and Nissan (OTCPK:NSANY) Leaf electric brands also sold a similar number of vehicles each. I wanted to point out this huge difference between Tesla and Renault, in order to truly grasp the lack difference in market cap between the two companies. Tesla's current market cap is in the $26 billion dollar range, while Renault is in the $24 billion range. The difference in valuation is almost non-existent, while the difference in sales volume is huge.
It is true that there are many other important factors involved in the value of a company, such as profitability, debt load, growth potential and so on, but still Tesla's market cap comes in at over $1 million for every car sold in 2013. By comparison, Daimler's (OTCPK:DDAIY) market cap per unit sold comes in at around $43,000. I chose Daimler as a comparison for this particular measure because its cars sell at a luxury premium just like Tesla's product lines.
Tesla is currently not a very profitable company. It achieved just over $2 billion in revenue and incurred a small loss of $74 million, according to its last statement for Q4, 2013 and full year results. Renault, on the other hand, had just under 41 billion euros ($56.5 billion) in revenues and 700 million euros ($966 million) in net income for 2013 according to its full year results. Tesla's profitability should increase as it becomes a higher volume operation, but I question just how large the volume will be in the future.
It is the expected sharp increase in sales which seems to drive stock price in Tesla's case. Renault had a year on year increase in sales of 3.1% in 2013, which should improve greatly in 2014 due to the end of the recession in the EU, while Tesla expects an increase of over 55% in sales for 2014. It is understandable therefore why so many people want to be part of this story. If this pace of year on year sales increase were to be kept up until 2020, sales volumes would be close to 500,000 units by then, which would justify the current stock price. However, expecting such a huge increase in sales ignores many of the realities of the U.S. and global market for Tesla's product lines.
The car market will be shaped by a less affluent global middle class.
When we think of electric cars, we think of human ingenuity in action, tackling the problems of the world, such as the reality of finite hydrocarbon resources and climate change. It is the answer that does not require the dreaded sacrifice of our living standards, therefore it is easy to swallow. It is the feel-good story about humanity. Renault on the other hand is the complete opposite. It began the strategy of offering decent, but not outstanding cars for a low price with its acquisition of Romania's Dacia brand in 1998. This strategy is betting on an expansion of the world's lower middle class rather than that of the more affluent global middle class strata, which is more reflective of what we came to expect middle class to mean in the developed world. Incidentally, the launch of Renault's low-cost car strategy coincides with the peak in U.S. median household income in 1999, just a year after Dacia was acquired. Since then, U.S. median income is down about 10% and there is no sign of the current recovery yielding any gains, therefore the long-term trend is still down, because the next recession will most likely bring this number down a few more percentage points, while it seems the recovery period no longer lifts real household income following recession (link).
Source. Note: 2013 is an estimate only based on data so far. It is the first year since 2007 that we seem to be gaining.
It is due to this trend that Renault's Dacia brand actually matches Tesla's growth trajectory more or less, with 46% growth in year-on-year sales registered in Europe in the first quarter of 2014 (link). At the moment it does not register to such a great extent in terms of Renault's overall sales volume growth, but as the low-cost Dacia brand continues to grow and makes up an ever larger proportion of total sales, Renault's total yearly sales volume will likely accelerate as well.
Renault's Dacia brand is growing its consumer base from both sides of the main global economic trend. In the developing world it is growing due to the continued increase of a middle class, which compared to the developed world's middle class earns only a small fraction of the income we earn; therefore they are in the market for lower cost cars. Dacia is also growing in the developed world due to many households moving down the income ladder and also because job security is not what it used to be, therefore fewer people are willing to commit to taking on large piles of debt. In Italy for instance, Renault sales increased 37.4% in 2013. In Spain the increase was 21.4%, while in the U.K. sales doubled (link). The main reason for this increase is because of the Dacia brand which offers models such as the Dacia Logan that sell in the 8,000 Euro ($11,000) range. By comparison, a similar size and performance car such as the Ford (NYSE:F) Focus will sell in the $20,000 range. Renault's commitment to low price is evidenced by the fact that expansion of Dacia car production was not done in Romania where it currently pays the average worker just over $1,000 per month, but in Morocco, where wages are only half as much.
A car for the 1% lacks room to grow.
Tesla on the other hand is limited in terms of room to grow. Its current product line is literally tailored to the 1%, given that its model S sells for about $100,000 on average once all options are factored in on top of the base price. In the U.S., where Tesla currently sells most of its cars, this means than only about three million households make up its potential consumer base. Going worldwide would expand that base to over ten million households. The model E, which is supposed to hit the markets in 2016, is going to sell for far less, perhaps as low as $35,000 (base price). However, even in this price range the potential market, while much larger, is not a growing one by any means. It would still cater mainly to households than earn over $100,000 per year and the market in this range is already heavily saturated with options; including the ones coming from the Mercedes C Class line, which has a base price of $36,000.
In conclusion, expectations of Tesla continuing to increase sales at around 50% per year for many years to come will most likely leave people betting on it very disappointed. Unlike Renault's Dacia, which currently sells cars that are considerably cheaper than the cost of putting a battery into one of Tesla's model S ($15,600) and therefore can literally count on billions of people to be potential customers, Tesla will never have a potential customer base larger than tens of millions of households. If first quarter results are any indication, it seems U.S. sales are already in more or less stagnation mode, given that in the first three months of this year only 4,600 units were sold, which on a year on year basis is almost flat. Growth for this year is expected to come from Europe and Asia where the market is just now being tapped, but if the U.S. is any indication it will be tapped out in no time.
Tens of millions of potential customers may still sound great if we were to assume that in the next few decades all of these households will opt for a luxury EV. We have to remember however that this potential customer base is not really growing very robustly lately and is already dominated by many other luxury or semi luxury brands. Even in the EV market there are many competitors. We also have to keep in mind that we cannot necessarily count on government subsidies for EV's to be in place forever. Many of the same countries that offer such incentives are also being squeezed fiscally. The U.S. government currently offers $7,500 in tax credits for buying a Tesla. For all we know we could be just an election away from having a new government in place, which will reconsider this government expense.
If one is looking for an automaker that has the potential to increase sales every year for a long time to come by 50% or even more, the best bet is to look at manufacturers striving to produce a $5,000-$10,000, somewhat decent car at a profit for the global market. The EV story is just like the hybrid car story we already saw play out. If we think back to the first years in the late 1990's the assumption was that it will not be long before hybrids will be the rule rather than the exception, therefore we were looking at human innovation saving the planet from ecological disaster and resource depletion. By 2012, fifteen years after the first hybrids started selling, only 4.5 million hybrids were sold worldwide cumulatively (link). In the meantime, over a billion passenger cars fueled by gasoline or diesel were also sold. It will be no different for electric vehicles. We may reach sales of perhaps a million per year a decade from now, but Tesla will be only a fraction of that market, given that there are other competitors out there. So at the most, Tesla will reach sales of a few hundred thousand units per year (in the low hundreds of thousands range most likely) in the foreseeable future, which does not really justify the company's current valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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