Tesla's Revenue Would Need To Increase More Than 40 Times To Justify Its Valuation

Summary

• Tesla is enormously overvalued at this time by every reasonable metric. Its share price has gone up by 1000% in the past year.
• The company would have to grow to have a near 50% market share of all cars sold worldwide to justify its valuation. Toyota currently has a 12% share.
• The company has other side businesses that can support the company, such as its solar and battery business, however, they won't help the valuation with lower margins.
• The company is opportunistically using its current share price to issue equity, which we're a fan of. But it will hurt current shareholders.
• We instead believe that current shareholders should sell their stock and take their wins.
• I do much more than just articles at The Energy Forum: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

With Tesla's (NASDAQ: NASDAQ:TSLA) market capitalization approaching a $500 billion mark, it's time to take a good long look and ask... how? Tesla's market capitalization is now more than Ford (F), General Motors (GM), Mercedes, Honda (HMC), Nissan (OTCPK:NSANY), and Toyota (TM) all combined together. That's despite a roughly 0.5% stake of the worldwide car market, which for reference, Toyota alone has 12%.

As we'll see throughout this article, as Tesla's market capitalization has crossed any semblance of a reasonable valuation, investors should now sell and reap the rewards.

Tesla - Tesla

Tesla Valuation

Tesla's valuation has gone up dramatically by any metric worth paying attention to.

Tesla TTM Revenue and Income - YCharts

The above graphs highlight Tesla's TTM revenue and EPS diluted over the past 12 months. It's worth highlighting that throughout this time, the company's share price has increased by nearly 1000%, taking the company's market capitalization from roughly $45 billion to $450 billion. Right now the company went from trading at roughly 1.8x TTM sales to nearly 20x the same number.

It's worth nothing that Tesla has swung to a GAAP EPS profit, with $0.384 billion in 2Q 2020 profits. However, the company also achieved these numbers with numerous accounting tricks to paint a picture of exciting financial profitability for shareholders. At the same time annualized profits of ~$1.4 billion doesn't justify a $450 billion valuation.

Tesla Theoretical Valuation

Of course it wouldn't be fair to solely value Tesla off of its current profits. Obviously the company does have some growth potential. We'll analyze here its potential fair valuation.

Largest Car Manufacturer Revenue - Statista

The above graph shows the world's five largest car manufacturers by revenue. Together, these companies had $1.037 trillion in annual revenue with a particularly strong year with car manufacturers having an EBIT margin of 5.5%. Very few car manufacturers achieve their size without having significant debt and interest, and the US corporate tax rate is 21%.

However, the $1.037 trillion in annual revenue translated to $57 billion in EBIT which translated into $45 billion in post-tax income. However, it's worth noting at this point Tesla still has $7 billion in net debt. The company has $25 billion in annual revenue, meaning they would arguably need to be 46x their current size to achieve their revenue targets.

Achieving that level without significant debt spending seems unlikely. However, the net perspective here is that there's a "theoretical point" in size where Tesla's current valuation would be justified. However, it would need to grow to dominate a significant part of the car market. While electric cars are becoming increasingly popular, Tesla does have significant potential competition.

Tesla Upcoming Competition

So far, Tesla has managed to achieve its size with minimal competition for the electric car market, especially the premium segment. Here are the top electric cars from back in 2019.

Top Electric Cars - Clean Technica

These are the top 20 electric vehicles in the world from last year. As can be seen, Tesla is well positioned across the list with the top selling Tesla Model 3 and other well selling cars. In fact, the company managed to account for 19% of the total global plug-in market. However, it's also worth noting that even if the company maintains a 19% market share, its valuation isn't justified.

More so, significant upcoming competition is coming to electric vehicles. Tesla has performed well for as long as electric vehicles have been their own separate luxury segment. However, as electric vehicles are expected to grow, every other manufacturer is planning to supplement their existing models with electric versions.

Some popular versions are coming in the coming years. Across the board not only has Tesla's success inspired new car startups copying their electric business model, but core car manufacturers are making new electric products. Mercedes, BMW, Ford, Chevrolet, Jaguar, and Audi are all releasing electric versions of their most popular vehicles.

As a result, this competition can stand to significantly hurt a company that before now has never had any true competition. We expect its highly likely that five years from now Tesla's market share will be well below 19% in electric vehicles. With the global auto industry at roughly $2 trillion, Tesla needs, as we discussed 50% market share to justify its valuation.

Tesla New Business Opportunities

It's worth discussing here that Tesla does have some side businesses that can help support its valuation.

Global Solar Panel Market - Grand View Research

The current global solar market is $115 billion with the U.S. market at roughly $10 billion. Both markets are expected to grow at the mid-single digit annualized, and Tesla does have a foothold in the market through its $2.6 billion acquisition of SolarCity back in 2016. The company, since then, has continued to work on projects such as its solar roof.

However, Tesla currently earns only 7.2% of its revenue from both solar panel installation and its energy storage concepts. While SolarCity earns more than $1 billion in annual revenue, gross margin is less than half of the company's car business gross margin, meaning the chance of being a large component of the >$1 trillion in revenue the company needs to justify the valuation is small.

Specifically, with half the margin of the company's car business, even if the company can get a 50% market share, that's $50 billion in annual revenue, subtracting the required "car revenue" by 3% from where the company needs to be in the valuation. As a result, while these side businesses are exciting, they don't help the company's valuation.

Our Forecast

Our forecast is that Tesla understands it's incredibly overvalued at this time. Tesla understands this too - it's been opportunistically issuing equity as prices go up.

Tesla Outstanding Shares - Macro Trends

Tesla issued $2 billion in stock at a post-split price of roughly $144 earlier in the year. That stock currently is worth $5 billion. The company saw its share price suffer today on the back of plans to issue another $5 billion in equity. The company is intelligently and opportunistically taking advantage of current share prices to raise capital.

We'd like to see the company expand that significantly, potentially looking to raise as much as $50 in equity. Short-term shareholders would be disappointed, but long term, the company's financial position will improve dramatically. Additionally, the company will significantly improve its cash position, enabling it to expand its investments.

Past that, Tesla has seen its stock price expand significantly in prior times and contracted. From the company's mid-June 2017 peak, it returned -45% over the subsequent two years. The company's significant current valuation, with no major catalysts such as the Model 3 from a sales perspective, stands to drop dramatically over the coming years.

It's also worth noting the majority of Americans invested their stimulus checks and other cheap capital in the markets. That amount of cheap capital supported share prices in the market recently, but there's a lack of equally low cost upcoming capital. However, the $20 billion drop in market capitalization for a $5 billion equity issuance highlights how the current run up is more because of a share shortage than from true valuation.

Conclusion

Tesla is, by any reasonable metric, incredibly overvalued at this point. The company is priced equivalent to most of the world's largest car manufacturers combined. The company would need annual revenue of more than $1 trillion to justify its valuation. That would be near impossible for the company, especially without significant debt.

The company is making some prudent decisions at the time, such as raising equity at its current valuation, which we believe can be expanded easily. However, the company still struggled, losing 4x the amount of its announced equity issuance today. Shorting the company is hard, but we recommend investors take their current gains and sell their stock.

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.