Tesla Investors Are Floating The Amazon Without A Paddle

| About: Tesla Motors (TSLA)

Summary

Tesla Motors stock trades at a lofty valuation despite the company’s consistent and ongoing losses.

This phenomenon is not unique to Tesla. Several companies have traded at “obscene” multiples in recent years.

Tesla supporters point to the valuation of companies like Amazon to justify the share price.

Does this argument have merit? Let’s dig in and find out.

For much of its existence, Amazon (NASDAQ:AMZN) was known as a stock with a "ridiculous" market valuation based on its fundamentals. The company was consistently unprofitable and the target of jokes among many in the investment community.

In recent years, however, Amazon has turned the corner on profitability and grown into a company with a $330 billion market cap. Today, it trades 10x higher than it did when its valuation was deemed preposterous, largely on the profitability and growth in a relatively new part of its operations.

Tesla Motors (NASDAQ:TSLA) is the target of similar barbs to those that were earlier endured by Amazon. Tesla is consistently unprofitable, yet its stock trades at a level that many (including myself) consider sky-high.

Many TSLA investors point to the troubled history and eventual success of Amazon as evidence that Tesla's valuation is justified. I decided to compare the companies and see if the argument holds up.

The Businesses, Part 1: Amazon

Amazon is really a large umbrella under which several unique businesses operate. A detailed analysis of each business unit could rather easily fill several articles. In the interest of maintaining focus, I will discuss three primary units that are widely recognized as the firm's bread and butter.

1. Retail

Most people are aware of Amazon's dominance of the retail e-commerce market. Today, Amazon has a 7x larger e-commerce market share than its leading contender (Walmart). It dominates its space in a way in which few companies can even dream of doing.

The revenue model for Amazon's original and most famous e-commerce operations is similar to that of any other retailer, whether internet or traditional brick-and-mortar. Amazon purchases products from vendors, marks them up, and sells them to the public.

Amazon Marketplace offers e-commerce services to other businesses. Retailers like Lands' End and Target, who have e-commerce platforms of their own, leverage Amazon's Marketplace to ensure their products get in front of the latter's enormous user base.

In other cases, vendors can leverage Amazon not just for exposure and e-commerce, but for warehousing and order fulfillment as well.

For the most part, the retail arms of Amazon are low-margin businesses. The only way to make these units profitable (and highly valuable) is to ingrain consumer behavior and achieve high market share and order volume.

2. Prime

Prime is a subscription service that has both features of its own and grants premium features to Retail customers. Prime subscribers get upgrades such as "free" 2-day shipping on retail purchases. They also have access to "free" content, such as e-books and streaming video content.

Prime itself is not a money-maker. However, it offers two distinct advantages to the business. Prime offers recurring revenue (cash flow) and encourages utilization of other Amazon products and services, helping drive growth and profits in other segments of the overall enterprise.

3. Web Services

Amazon Web Services (AWS) comprises 60+ unique businesses/products in its own right. These include everything from allowing companies to develop their own e-commerce applications on Amazon's platform to data migration and cloud hosting services.

AWS sprang from Amazon's own operational needs. Amazon was able to transform those needs into a VERY profitable business with an enormous addressable market. Last year, AWS brought in almost $8 billion in revenue, and operating income of nearly $700 million.

That's 70% YoY revenue growth, by the way, in a PROFITABLE enterprise.

The Businesses, Part 2: Tesla

Today, Tesla operates two businesses: Tesla Motors and Tesla Energy.

1. Tesla Motors

As most are aware, Tesla's primary business is making and selling automobiles. Tesla has some notable market advantages in this space.

First, Tesla makes the only long-range BEVs on the market today. Along with this, Tesla also has the only extensive fast-charge network exclusively available to drivers of its vehicles.

In reality, this makes Tesla the only BEV option for people who commute long distances or want to take cross-country trips in the car.

Second, Tesla has a highly valuable brand image. In my last article, I discussed how Tesla is truly an aspirational brand. Its early vehicles have been available exclusively to society's wealthiest, and that exclusivity creates a mystique and desirability around the brand.

The level of excitement around the Model 3, and the enormous number of customer deposits, offer proof of this. GM's (NYSE:GM) plans to produce only 30,000 and 50,000 units of the Bolt, despite 375,000 or so deposits for the Model 3, lends further credence to this argument.

In short, a lot of people WANT to buy a Tesla, assuming they can afford one. This is Tesla's advantage in its space.

2. Tesla Energy

Last year, Elon Musk announced the advent of Tesla's stationary storage business. It seemed like a no-brainer. Tesla already had shown a competency in designing and building battery packs. Why not extend that knowledge to a new market?

The addressable market also appeared large. First, home battery storage could appeal to anyone who wanted some sort of backup power for their home. Second, utilities could leverage storage on a large scale to more efficiently store and deliver electricity to consumers.

It turns out this isn't quite so simple, and for a variety of reasons. The cell chemistries that are acceptable for a BEV are not ideal for stationary storage applications.

Further, with the possible exception of home storage, brand name means just about nothing in stationary storage. Is a utility company going to be impressed by the Tesla name? Not likely.

In fact, as most utilities operate under the paradigm of trying to make money, they naturally pursue the lowest-cost effective solution.

This creates a "race-to-the-bottom" commodity market, similar to cheap Android smartphones: lots of players, jostling for market share, and making next to no money.

Can Tesla differentiate itself in stationary storage? The answer is almost certainly no. At least, I haven't heard any persuasive explanation of how Tesla would do so.

Can storage contribute to the bottom line? Perhaps a little, but not significantly. It certainly doesn't do anything to justify the company's current valuation.

Why The Comparisons Fail, Part 1: The Business Models

Amazon operates several different businesses.

Giving Tesla the benefit of the doubt and including Tesla Energy, Tesla operates only two.

So what? Well, if we are looking for comparisons between Amazon and Tesla, we can really stop right here. Here's why it matters.

Should one of Amazon's businesses falter, or should the company realize one of its businesses doesn't have a viable future, Amazon can sever the gangrenous limb and leave the rest of the body healthier as a result.

This is especially true on the retail side. Should one of Amazon's retail models stop working, it can simply move on to more effective models without compromising its overall viability.

Even so, some of Amazon's units are beneficial even if on a stand-alone basis they are money losers. Prime is a giant money pit as a stand-alone business. But it strongly influences consumer behavior in the retail channels, driving more business to Amazon retail, and thereby making it a valuable part of the overall enterprise.

Further, Amazon sells hundreds of thousands of products. Obviously, some turn out to be more lucrative than others. By offering such a product mix, Amazon can pivot at will, discontinuing the poor performers and exploiting the winners.

Additionally, it costs Amazon almost nothing to add a new product to its lineup. Each product represents a tiny fraction of Amazon's costs, and the occasional disappointment is little more than a blip on the radar.

Why Is Tesla Different?

The product range dynamic is far different for Tesla. Until the Model 3 arrives, Tesla's ability to drive revenue depends entirely upon demand for only two products - the Model S and the Model X. (Add Powerwalls and Powerpacks if you wish, but make sure to tell me how much net profit you envision them generating in 2016 and 2017.)

I outlined in my last article why I believe having so few products, combined with the total addressable market for BEVs, is a problem for Tesla.

But the primary point here is not that Tesla has so few products. Rather, it is that it's INCREDIBLY expensive for an automaker to design and produce even one more new product. Failure in the market of even one model has a serious financial impact on any automaker, and it could deal a death blow to a small one.

To put this in perspective, Toyota (NYSE: TM) is the world's top-selling automaker, with a large number of established vehicles in its lineup. Last year, Toyota managed approximately 8% net margins on revenues greater than $155 billion. Ford (NYSE:F) and General Motors (GM) were closer to 5-6%.

Say what you will about these companies, but compared to Tesla, they are the models of efficiency. Tesla is using less than 20% of its factory's production capabilities (based on the NUMMI days), but still claiming production constraints for its minuscule delivery numbers.

We have already begun to see the effects of a poor product launch on Tesla's financials. While the ending of the Model X story is not yet written, it is clear that Elon Musk's "Master Plan" (to use profits from the S and X to fund development of the Model 3) has unraveled.

And any serious issues with the Model 3 would absolutely be the end of Tesla Motors, at least as we know it today.

Why The Comparisons Fail, Part 2: The Financials

Putting aside the obvious differences in industries and business models, let's take a look at a favorite argument of Tesla investment enthusiasts: if Amazon's valuation could be justified based on losses (or at least lack of profits), then Tesla's should as well.

However, peering below the surface reveals two completely different sets of financials.

First and foremost, Amazon turned its first profit in Q4 2001, demonstrating the feasibility of just the retail-driven model (before Prime and before AWS). That was only five years after Amazon's founding.

Thirteen years in, Tesla Motors has never come close to making a profit. NOT. EVEN. CLOSE.

Additionally, Amazon has been able to fund its own growth. In fact, over the last several years, Amazon has even been a net purchaser of its own stock!

Tesla is quite the opposite. It needs to periodically issue debt and equity not only to invest in its growth, but also just to keep the lights on.

Notice how the blue line is consistently above the red line for Amazon, and consistently below for Tesla?

As it turns out, the argument about Amazon not making money is really an argument that Amazon doesn't make MUCH money given its enormous revenues. However, the company generates enormous piles of cash that it uses to continue to grow market share and build new, diverse businesses.

This, as I called out in my first contribution to Seeking Alpha, is what drives a high multiple: the ability to turn off the growth engine and settle into profitability.

Tesla generates cash by borrowing and selling stock. Its operations yield negative cash flow. Amazon is, and has always been, just the opposite.

Conclusions

Aside from famous and controversial CEOs, and lofty valuations that are difficult for many to justify, Tesla and Amazon could hardly be more different.

Using Amazon as any sort of measuring stick to value Tesla is a ridiculous exercise. Amazon is a diverse collection of numerous complimentary and cash-generating businesses, and an entity that has been able to finance its own growth via enormous operating cash flows.

Tesla is a cash-devouring monster that continues to exist ONLY because of its ability to sell more stock.

This doesn't mean Tesla is doomed to fail. With increased demand and efficient production, proper financial management, and a few technological leaps forward, it's certainly possible Tesla will turn things around.

However, the comparison with Amazon certainly makes TSLA stock an unwise investment at its current price.

In short, the comparisons to Amazon are preposterous. It's time to put that argument to rest once and for all.

The Knights Teslar will need a better comparison to justify Tesla's ridiculous present valuation.

Author's note: All of the opinions expressed in this article are mine and are not intended to serve as investment advice. These opinions drive my own investing strategy, and mine alone. Please do your own due diligence and consult with a professional advisor before making any investment decision.

Special thanks to Seeking Alpha contributor Montana Skeptic for his assistance with the "word-smithing" and styling of this contribution, and to member Dogfellow for sharing his criticisms prior to submission. Any errors are mine and mine alone, and their assistance to the process of preparing this and other pieces has been invaluable. My gratitude is sincere and heartfelt.

Disclosure: I/we 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.