Is Tesla fairly valued and can we measure Tesla's value via benchmarking?
Tesla (NASDAQ:TSLA) and its all-electric "Applesque" Model S have become stock market darlings and government supplicants, synonymous with the battle against climate change and the evolution of the electric automobile. But is Tesla worth its $250 share price and market capitalization/revenues ratio of 8.18 times its 2015 revenues? The purpose of this article is to determine Tesla's value via benchmarking.
When it comes to best practices in valuing a company through benchmarking the goal is to find good best-in-class corporate comparables. Through such comparisons we may see how financial ratios between two corporations correlate or diverge. We compare market perceptions and behaviors relating to the corporations to measure how risk is factored into their respective valuations.
Because Tesla is valued at such a high market capitalization, we will focus on big corporations and their market capitalization/revenue ratios to isolate their relative market valuations. Relative capital expenditures also are isolated to demonstrate the impact on corporate future cash flows.
Tesla has sold just 125,000 cars in 13 years. In 2015 Tesla says it delivered a bit over 50,000 cars. Meanwhile the total of all autos sold globally hit 88 million in 2015. Clearly Tesla's unit production is not material to the automotive industry. Therefore almost the entire value of Tesla resides in the future cash flow expectations of its investors.
Tesla has never made a profit. Its annual revenues in 2015 were a bit over $4 billion generating losses of almost $900 million. Capital expenditures were $1.635 billion. Tesla's market capitalization is $32.63 billion on a fully diluted basis - a market capitalization/revenue ratio of 8.18x.
In benchmarking Tesla to a conventional auto company, Ford Motor Co. (NYSE:F) sold 6.64 million vehicles in 2015. It had 2015 revenues of $149.6 billion, generating profits of $7.37 billion. Capital expenditures were $7.2 billion. Ford's market capitalization is almost $50 billion - a market capitalization/revenue ratio of .3x.
Tesla's 2015 market capitalization per auto sold was $600,000. Ford's market capitalization per auto sold was $7,530. Based on this comparison there is no conventional economic justification for Tesla's share value.
Perhaps the Tesla IT mantra is more like Amazon.com (NASDAQ:AMZN) - the Seattle IT monster founded in 1994 that has defined Internet retail sales and cloud services globally. Amazon never made a dime until quite recently, with 2015 profits of roughly $600 million on revenues of $107 billion. Amazon's capital expenditures were $4.6 billion. Amazon's market capitalization is $280.4 billion - a market capitalization/revenue ratio of 2.6x, one third of Tesla's ratio.
Tesla is one of the smallest players in the global auto sector, offering few models. It is burning cash to build its new Model 3 production line as well as the world's largest and most expensive battery factory from scratch. Amazon has deconstructed scores of retail sectors and is a first mover in global Internet cloud services. Based on this comparison there is no conventional economic justification for Tesla's share value.
Or is Apple (NASDAQ:AAPL) a valid comparison? After all, the hype is that Tesla appeals to the Apple customer. Apple 2015 revenues were $235 billion, generating profits of $53.7 billion. Apple's capital expenditures were $11.6 billion. Apple's market capitalization is $602.5 billion - a market capitalization/revenue ratio of 2.56x, less than one third of Tesla's ratio.
There is no rationalization I'm aware of that can argue Tesla has greater intrinsic per share value than Apple or stronger future cash flow expectations. Based on this comparison there is no conventional economic justification for Tesla's share value.
But Tesla just announced its long awaited $35,000 Tesla Model 3, causing a jump in Tesla share value. This is a car with no set delivery date (end of 2017?) and no guarantee on either its features or its base price. Much has been made of Tesla's surge in 325,000-plus advance orders for this new model. The press has bantered about a future orders revenue value of $11 to $15 billion as proof of Tesla's success.
But one should note that the average reservation deposit is $1,000, equaling just $335 million, and that these reservations can be refunded at any time up to delivery. Hence this jump in Tesla share value is for a car for which Tesla has no production line and insufficient battery production to deliver a single vehicle until an unknown date.
Perhaps this is unfair. Perhaps we should compare Tesla and its early orders with European aerospace giant Airbus Group SE (OTCPK:EADSF). Airbus's total order backlog is a record-setting 6,787 aircraft worth roughly $1 trillion.
Airbus had 2015 revenues of $64.5 billion, generating profits of $2.7 billion. Its capital expenditures were $2.9 billion. Airbus' market capitalization is $44.7 billion - a market capitalization/revenue ratio of .7x - Tesla's market capitalization is 11.7 times larger. Based on this comparison there is no conventional economic justification for Tesla's share value.
Tesla shares an auto-IT-vibe with Uber Technologies (Private:UBER). Perhaps that comparable is closer to the mark? Uber's groundbreaking smartphone app connects drivers with people who need a ride. As a private company its financials are not published. It is believed that Uber's 2015 gross revenues (total fares charged to app customers, before the drivers get their cut) were $3.63 billion in the first half of 2015, which would annualize at $7.26 billion. Net revenue however came in at $663.2 million in the first half of 2015, or $1.236 billion. Uber losses are estimated at over $1 billion in 2015.
Uber's last funding round suggests a value of between $60 billion and $70 billion - a market capitalization/revenue ratio of between 8.3x and 9.6x. At last a company valued higher than Tesla! But Uber is private and its mission is to deconstruct the very auto industry/transportation model that Tesla emulates. I see no parity in this benchmark.
Conclusion is that Tesla stock is a sell.
Tesla essentially sells a basic commodity - electric cars. It attracts attention because of its innovation, scarcity and elegant design. Its brand sends a political message layered with the appeal of a luxury buy. It is a great product in a great niche.
Tesla can be compared with Ferrari N.V. (NYSE:OTC:RACE) and its unique hand built race cars. Ferrari had 2015 revenues of $3.26 billion, generating profits of $328.6 million. Its capital expenditures were $211 million. Ferrari's market capitalization is $7.78 billion - a market capitalization/revenue ratio of 2.4x - one third of Tesla's market capitalization. Based on this comparison there is no conventional economic justification for Tesla's share value.
Unlike Ferrari, Tesla has never made a dime on its luxury Model S (or Model X). The prospects for turning a profit on a car sold at half that price are illusionary, especially given the daunting capital expenditures required to simply roll off the first Model 3.
The federal $7,500 per vehicle tax credit will disappear by law when Tesla hits 200,000 in total electric car sales - just 75,000 units away. Arguably federal tax credits do not mean much to the buyer of the $70,000 Model S. However the $35,000 Model 3 buyer may be far more sensitive to the loss of the $7,500 tax credit equal to over 20% of the sticker price.
It may be that Tesla can lobby that ceiling higher, or play with calendar accounting to game the law, but ultimately Tesla will lose the credit. If it cannot be extended that may be a deal breaker for many Tesla Model 3 buyers.
All in all, it is my considered opinion that Tesla shares are exploring the upper reaches of its value parameters. I recommend taking your profits and selling Tesla.
Is it time to short Tesla?
Environmentalist Bjorn Lomborg has noted that the entire manufacturing and charging life cycle for electric cars can produce more carbon than small, efficient gas-powered cars. Nevertheless Tesla benefits because of U.S. government policy bias for fully-electric cars.
The specter of our government subsidizing the purchase of a $70,000 electric car at the expense of most folks who cannot afford cars at that price point is a classic example of market distortion. Energy subsidies are beneficial to those who use the most energy - who are the 1% who can curry such "favors" and afford such cars. Or perhaps more to the point, how many federally subsidized electric charging stations do you think there are in the poorest neighborhoods of Chicago, New York, or Los Angeles?
Tesla was supercharged in a Barnum & Bailey Department of Energy (DOE) circus atmosphere commencing in 2009 revolving around the politics of global warming and $32 billion in alternative energy taxpayer subsidies, loans and grants. Tesla has garnered hundreds of millions from government sources. However, in 2015, of the 4 trillion kilowatt-hours of electricity generated in the United States, 67% was from fossil fuels (coal, natural gas and petroleum). How does this make Tesla green?
At some point this kabuki theater will begin to play out, much as the federal corn ethanol subsidy market distortion is coming back to earth. In my opinion Tesla is a stock to consider shorting.
What does the near term future hold for Tesla?
In the near term three-year window Tesla will endeavor to build its Model 3, a car for which it has no operating production line or battery capacity. It is in Tesla's nature to build the infrastructure required. Auto industry experts estimate that capital expenditures for this task will easily reach $11 billion, a third of Tesla's market capitalization. Raising this cash will dilute the current shareholders of Tesla, hence our recommendations are to take your profit or short the stock.
Tesla may continue to reap the benefits of its iconic brand name and politically favored status for some time. But inevitably serious competition will arise from trusted brand names possessing far greater resources.
The Tesla Model S P90D is the best in class electric car today and for the near term. However BMW, Audi and other luxury car companies are already introducing beautiful EV models, such as the Audi Q6 e-Tron Quattro EV, which will negatively impact Tesla's unique Model S niche.
However the real risk is for Tesla's Model 3. Honda Fit EV, Nissan Leaf, Toyota RAV4 EV, Ford Focus Electric, Mitsubishi i-MiEV, and a host of other new competitors are priced aggressively and being sold NOW in that magic $30,000 to $35,000 range - not in "late 2017." Inevitably Tesla stock will step through the looking glass and back into reality.
Richard Wottrich, Blog Author, DSI Global View LLC, dsiglobalview.com firstname.lastname@example.org
Disclosure: I am/we are long ON APPLE.
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.