What To Make Of Tesla’s Unique Market Cap

3 months ago by EVANNEX 45

Tesla Model S and Model X at Tesla’s Fremont factory showroom

MAKING SENSE OF TESLA’S MARKET VALUE

Stock market analysts have never known what to make of Tesla. On the day the stock went public in 2010 (the first IPO of an automaker since Ford in 1956) pundits on the stock-market shout shows were ridiculing the company, which was losing money and had sold only about a thousand cars. But Tesla [NASDAQ: TSLA] surged over 40% on its first day, making it the second-best IPO of the year, and hasn’t looked back since.

*This article comes to us courtesy of Evannex (which also makes aftermarket Tesla accessories). Authored by Charles Morris.

Many traditional stock-watchers have trouble understanding Tesla’s products, and most are completely baffled by the movements of its stock. In their world, stock values are supposed to be determined by quarterly earnings and, except for a couple of quarters here and there, TSLA has consistently posted losses. The short interest (investors who are betting that the stock will go down) has always been sky-high (one can only imagine the fortunes that have been lost over the past 7 years).

Wall Street analysts disagree wildly about Tesla. At the moment, a roughly equal number have “buy,” “sell,” and “hold” ratings on TSLA shares. In recent weeks, the stock has had another of its not-uncommon mini-boom-bust cycles, soaring to near its all-time highs on news that Model 3 is firmly on the road to production, then falling again after a mixed earnings report. Yesterday it jumped again.

Market cap comparison as of March 3rd between Tesla, Ford, GM, Fiat-Chrysler, and Nissan; values are in billions of dollars (Source: CleanTechnica*)

Market cap comparison as of March 3rd between Tesla, Ford, GM, Fiat-Chrysler, and Nissan; values are in billions of dollars (Source: CleanTechnica*)

One thing that truly does seem inexplicable: the fact that Tesla’s market capitalization has surpassed that of much larger companies such as Fiat Chrysler, Renault, Hyundai and Nissan, which are producing many times more vehicles (and golly, Nissan even has an EV!). In fact, Tesla, which sold just over 76,000 cars in 2016, has a market value not that much lower than that of giants GM (which sold 3 million vehicles in the US alone) and Ford (2.6 million).

Comparing market cap of both Tesla and Renault (Source: Quartz*)

Comparing market cap of both Tesla and Renault (Source: Quartz*)

The thing to remember is that stock prices never reflect the present, but rather a prediction of the future (by no means all investors are obsessed with the next quarter’s results). Electric and self-driving vehicles are the future, and Tesla is far ahead of any other automaker in both fields (how many of GM’s 3 million cars have anything like Autopilot?).

Comparing market cap of both Tesla and Suzuki (Source: Quartz*)

Comparing market cap of both Tesla and Suzuki (Source: Quartz*)

Many an internet company sees its stock price soar even as it burns through cash, because it is assembling a critical mass of “eyeballs” in some growing sector. Tesla is doing something similar in the auto game (and in solar energy, storage, ridesharing, and…). Elon’s true believers are betting that by the time the gentlemen (and lady) in the huge black SUVs figure out what’s going on, Tesla’s lead in technology, expertise and market share will be solid enough to withstand the worst they can unleash.

Comparing market cap of both Tesla and Peugeot (Source: Quartz*)

Comparing market cap of both Tesla and Peugeot (Source: Quartz*)

If the hopes of Tesla bulls seem irrational, so too do some of the hobbyhorses of the Tesla bears, in particular their insistence that Model 3 will be delayed, and that this will be a disaster for the company. As James Ayre of CleanTechnica* recently wrote, “in the imaginary world of finance…nothing seems to be correlated to what happens in the real world in any substantial way… Everything just seems to boil down to typical primate behavior: belief, projection, and dramatics.”

Comparing market cap of both Tesla and Hyundai (Source: Quartz*)

Comparing market cap of both Tesla and Hyundai (Source: Quartz*)

Mr. Ayre doesn’t believe that a Model 3 launch delay, if it happens, will amount to much more than an opportunity for traders to make money on a temporary dip in the stock price. “With the market share and customer goodwill that the company has built up to date (as a reminder, worldwide, not just in the US), [Tesla may be able to] expand rapidly over the coming years – and to conquer more and more of its competitors’ territory throughout the automotive, energy storage, solar, and on-demand taxi service sectors.”

Comparing market cap of Tesla and other competitors including Honda, Ford, GM, and BMW (Source: Quartz*)

Comparing market cap of Tesla and other competitors including Honda, Ford, GM, and BMW (Source: Quartz*)

Mr. Ayre and others of a bovine persuasion believe that Tesla’s stock will continue to rise, in irregular spurts, as traders make money on “the frantic groupthink fluctuations that see the herd stampede back and forth based on the appearance of truly minor events.” The long-term outlook is “pretty damn good.”

===

*Source: Quartz, CleanTechnica

*Editor’s Note: EVANNEX, which also sells aftermarket gear for Teslas, has kindly allowed us to share some of its content with our readers. Our thanks go out to EVANNEX, Check out the site here.

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45 responses to "What To Make Of Tesla’s Unique Market Cap"

  1. leafowner says:

    OK — I’ll say it first…..Tesla will be the top selling US brand globally in 15 years…..

    1. Thomas says:

      ????
      The joke of the century

    2. Cavaron says:

      Didn’t Elon Musk imply this as he said: “Tesla could be the first trillion dollar company”?

    3. mx says:

      Exactly Correct.
      That’s why the Market has moved, out of the old car companies with no vision, to Tesla. Tesla is building for rapid growth along with no one else.

      That’s the difference between the Wall Street Mouths, and the Market.

      1. Mark says:

        Except for the fact that it hasn’t.

        Tesla is still a niche player in a niche market.

        In 5-10 years, Tesla may be a more accesible option for more buyers, but it’s currently not even accessible for the majority of car owners, so it’s not a mainstream option.

        Tesla has more in common with Mercedes than Chevrolet.

  2. CDAVIS says:

    OP EVANNEX said: “…One thing that truly does seem inexplicable: the fact that Tesla’s market capitalization has surpassed that of much larger companies such as Fiat Chrysler, Renault, Hyundai and Nissan, which are producing many times more vehicle…”
    ———-

    Perhaps because Tesla’s ability to innovate and get that innovation into production cars today has surpassed that of much larger companies.

    Tesla Model S is currently the best selling large luxary sedan in North America & Western Europe…that in itself is an amazing accomplishment which its significance cannot be over stated. It does not take much imagination/logic to forecast how Tesla will impact the much higher volume mid-market with Model 3 and later also Model Y. Then there is also Tesla Energy…

    Tesla is very likely to be the largest market-cap auto company (by then even more an “energy company”) within the next 3-5 years by a comfortable margin.

  3. ffbj says:

    I think it’s the tulip bulbs you get with every car and the map to your south sea holdings, oh and the Mexican railroad stock. j.k.

  4. Clayton says:

    Market cap is a very incomplete story. Tesla is absolutely not worth as much as Ford.

    A more complete value of a company is “enterprise value”. That is market cap + net debt.

    If you were going to write a check to buy a company, the enterprise value is a more accurate measure of the size your check will need to be.

    Ford’s enterprise value is still ~3x more than Tesla.

    1. Clayton says:

      Ford’s enterprise value = $150 billion (https://ycharts.com/companies/F/enterprise_value)

      Tesla enterprise value = $50 billion (https://ycharts.com/companies/TSLA/enterprise_value)

    2. Clayton says:

      Toyota enterprise value = $301 billion, 6x Tesla (https://ycharts.com/companies/TM/enterprise_value)

      When you look at enterprise value, the “unique market cap” isn’t so strange. Tesla is 1/3 the value of Ford and 1/6th the value of Toyota.

      Still richly valued and still prices in large expected growth. But not so irrational when you look at the real value of these respective companies.

      1. philip d says:

        Even by this metric it would have been unthinkable to be having this conversation 8 years ago right before the Model S reveal.

        Even as a huge supporter back then I wouldn’t have believed you if you would have predicted that Tesla would have a value 1/6th that of Toyota Motor Co. in 8 years!

        1. Clayton says:

          I’ve been an stockholder for years. I plan to never sell.

          1/3 of Ford and 1/6th of Toyota is indeed amazing.

          I just feel obligated to correct this misnomer that Tesla is “worth as much as ford” because it is not.

          The stock and market cap represent the market’s opinion of what the shareholders own. That is half the story. The bondholders and creditors are the other half. To know the full value of a company, people need to look at the full picture.

    3. CDAVIS says:

      As OP Evonnex correctly pointed out:

      “The thing to remember is that stock prices never reflect the present, but rather a prediction of the future…”

      A public company’s “worth” is the company’s current market cap…which by definition is the fair market value.

      1. Clayton says:

        You are incorrect. Ford’s market cap is $46 billion. However, you could not buy it for $46 billion. You can’t buy it for even $100 billion. You would need to bring $150,000,000,000 to the table to buy Ford.

        Please read and understand: http://www.investopedia.com/terms/e/enterprisevalue.asp

        1. Clayton says:

          In addition:
          http://www.dummies.com/personal-finance/investing/investment-banking/investment-banking-what-happens-to-bondholders-in-mergers-and-acquisitions/

          “Change-of-control covenant: The change-of-control covenant is quite powerful and allows the bondholder to put the bonds back (sell back to the corporation) at a premium to principal amount of the bond if a qualified change-of-control event occurs.

          Common change-of-control events include the sale of substantially all assets, the acquisition of more than 50 percent of the issuer’s common stock by a third party, a merger with another company, and a liquidation of the company. This covenant effectively safeguards the bondholder against a firm taking on substantial leverage (as in a leveraged buyout) and weakening the bondholders’ positions.”

          1. Clayton says:

            Put another way –

            If Ford and Toyota had zero debt, their market cap would be much higher – likely approaching their enterprise value. They would have their assets free and clear (factories and such) and no interest expense.

            Imagine you own a $1 billion office tower based on your earnings and prevailing PEs for your line of business, the market values your company at $500 million. You also have a $750 million loan on the building that is non-transferrable. How much does it cost to buy your company outright? You will need to buy $500 million of stock (which will likely end up being more like $550 million+) and you will need to pay off the $750 million loan or line up your own financing. In either case, you’ll need $1,250,000,000+ in cash and/or debt to make the acquisition. If you don’t want to buy all shares and just want to buy 51%, you’ll still trigger needing to cover the $750 million debt.

            1. CDAVIS says:

              OK…got it…your saying “Enterprise Value” is better way to value Tesla and that the more Tesla goes into debt the more valuable they become.

              1. Clayton says:

                You clearly do not understand enterprise value yet. Read it a few more times to let it soak in.

                Ford’s debt, all things equal, reduces their market cap to the value that it is today. If they had less debt, their market cap would be higher, but their enterprise value would be the same as would the real price of buying the company outright.

                If Tesla had multiple gigafactories and several more factories to build 20 million cars, their enterprise value would be much higher. If they fund that purely through debt, their market cap would not be proportionally higher.

                Get it?

              2. Clayton says:

                Let me put it yet another way.

                If you have a factory that produces nothing, such as Elio, it’s just a building, and your enterprise value may be worth no more than the building (assuming you have no other valuable assets).

                If you have a loan for 100% of the building’s value, your market cap may be close to $0.

                Does that mean someone can acquire the building for close to $0? No.

                A poorly run business could have a lower market cap than the value of their assets. That does not mean you can buy the business and then own the assets for only the market cap. You need to pay off the debt related to those assets either as a check, new financing, or bankruptcy/bondholder negotiation, etc.

                If Ford had 0 debt, they would be worth around $150 billion. The fact that Ford *does* have so much debt, reduces their market cap to the $46 billion today, but they would still cost $150 billion to buy.

              3. Clayton says:

                And here is yet another way to understand.

                Look at Sears. They are a dying company. They have a market cap of $1.28b today.

                Look at their balance sh*t I mean sheet: https://www.google.com/finance?q=NASDAQ%3ASHLD&fstype=ii&ei=-WbdWMqjFo7_jAHUgqzYAw

                They have almost $4 billion of inventory.

                Does that mean you can buy Sears for $1.28 billion and then you just own the $4 billion of inventory and can sell it for a $3 billion profit? Nope.

                Market cap is not what it costs to buy a company. Market cap represents the shareholder equity in a company.

                1. Clayton says:

                  How the market values* the shareholder equity.

                  Guess I should make an account so I can do edits in the future.

                  1. Spider-Dan says:

                    AFAICT, no edits for anyone but staff.

                    1. Jay Cole says:

                      /this

                      …but we do actively monitor every. single. post.

                      So, if you reply to your own comment and say “replace that post with this:” It’ll get done, and usually inside a few minutes.

    4. mx says:

      Supply and Demand.
      No one want’s Ford “enterprise value”.

      1. Clayton says:

        Who owns a company and how much does it cost to buy?

        Shareholders own shares of the company that represent the equity stake in the company. Bondholders and creditors own the debt stake and have rights to the assets they wrote loans for, like the gigafactory.

        Shareholders are quickly reminded of this in bankruptcy when bondholders take control and are paid through asset sales before stockholders.

        Bondholders “own” (have rights to) the very real assets of Tesla, such as the gigafactory. In the case of Ford, many factories.

        To buy a company, you have to buy what the shareholders own and the creditors.

      2. Clayton says:

        And about $100 billion worth of Ford bondholders certainly do want Ford’s enterprise value.

        Literally 3x as many stockholders and bondholders in terms of dollars are in Ford than Tesla.

        $150 billion worth of investors in Ford. $50 billion worth of investors in Tesla.

        3x invested in Ford than Tesla. Supply and demand.

        Don’t be salty just because you don’t understand it.

  5. (⌐■_■) Trollnonymous says:

    Off topic but if passed, EV’s will get a boost in sales as Gas taxes increase…..

    https://www.usnews.com/news/best-states/california/articles/2017-03-29/ap-source-gas-tax-funds-52-billion-california-road-plan

    1. DJ says:

      Just scrap the high speed train from nowhere to nowhere and we’re all good 😉

      I’m actually kinda shocked that CA is proposing an “EV gas tax fee” in lieu of the taxes collected on gas.

      I wonder how it’d work for PHEVs. No matter what you try it’s gonna not be “fair” for some people.

      1. (⌐■_■) Trollnonymous says:

        “Just scrap the high speed train from nowhere to nowhere and we’re all good”

        I know right! Stupid Train.

        I think everyone was expecting the EV tax. I’m fine with the EV tax myself.
        There was no mention on PHEV’s though. I’m going to have to dig into that and see what my contact in the capitol knows.

  6. speculawyer says:

    It is truly astounding.

    It is obviously a market cap based on future potential. How much of that potential is in EVs? Powerpacks? Powerwalls? Solar Power (Solar City is now part of Tesla)?

    1. ffbj says:

      It’s the biggest thing that happened in the automobile industry in a long, long, time.
      The potential that in a few decades ice cars will be gone and will be replaced by evs make Tesla epic.
      They will dominate part of the electric epoch we are entering.

      1. speculawyer says:

        Tesla is the first successful new car company in nearly a CENTURY.

  7. Kdawg says:

    Meh.. it’s all just #’s in a computer. Sheet metal and wheels hitting the street matter more than Wall Street, to me.

    1. speculawyer says:

      Yes and no. Yes, it is EXTREMELY important to get that sheet metal and wheels rolling off the assembly line and onto the street.

      However, without those high magical numbers in a computer, Tesla would not be able to raise the capital necessary to continue building itself bigger. That stock price is key to raising billions to fund the gigafactory, Supercharger deployments, buy parts, finish up car designs, retool factories, etc.

      1. Martin Winlow says:

        But that doesn’t figure – given that Tesla’s stock price has gone up and down like a pair of tart’s drawers.

        Despite these oscillations, Tesla has never had any problem getting finance. So, something else is driving it and it is probably the same thing that drove me to buy a Model S as well as make a significant investment in the company.

      2. Kdawg says:

        I know that the “money” part is part of the equation. But my eyes kinda glaze over when it’s discussed.

  8. Another (Euro) industrial point of view says:

    One thing I know for sure is that I would not sleep at night if a substantial part of my savings was invested in Tsla. It could go back to 180 or go up to 350 before the end of the year in a snap.

    There nothing really to say about this market cap as it is indeed a bet on the future, both sides (bulls & shorts) have valid points, discussing which of them will apply eventually is a thorough waste of time.

  9. speculawyer says:

    Here is one of the unspoken reasons for Tesla’s really high market cap:

    In Elon we trust.

    1. Daniel says:

      Yep in Elon we trust, and the shareholders too hehe, Seriously, i think that one of the factors than make that the Cap its than Higher it´s simply that, the leadershihp of ELon at Tesla, without Elon at the charge the Cap would be significantly lower than where is today.

  10. Pushmi-Pullyu says:

    “…stock values are supposed to be determined by quarterly earnings…”

    I find it truly amazing how so many people, nearly all of whom ought to know better, buy into and support this delusion that stock prices are based on rational analysis of what a company or a commodity is worth. Ditto for the remarks about stock price movement given on nightly news shows, where they’ll describe the rise or fall of individual stocks, or the market as a whole, as if there was one single rational cause for the rise or fall. This is almost never true!

    Let’s start at the foundation of commerce: For there to be a trade of anything, including stock, there must be a buyer and a seller. The buyer places a greater value on the item than the seller. Note: If everyone placed the same value on everything, then no trade would or could ever take place! Often this difference in subjective value is entirely rational. For example, the farmer selling a bushel of corn knows quite well how much work he has put into producing that corn and bringing it to market. He knows exactly what its value is. And it’s not that the buyer has an inflated idea of the worth of the corn, it’s that he’d rather spend his time doing things other than plowing, planting, harvesting, irrigating, etc. The buyer is willing to pay the farmer more than the farmer thinks that corn is worth, because he’s not a farmer, and he spends his time doing other things and earning money in different ways.

    If stocks were bought and sold on their intrinsic value, like bushels of corn, then the only time anyone would actually make a profit or a loss on buying or selling is when the company originally sold them. After that, the stocks would always be traded at their appraised value. Of course, the statement from the article I quoted above is a vast oversimplification, but for the sake of argument I’ll pretend it’s entirely true: According to that statement, stock prices would only rise or fall according to the latest quarterly earning statement. There likely wouldn’t be enough buying and selling of stocks to set up a “stock market”, because everyone would value the stocks equally, giving no incentive for anyone to buy or sell except to generate or absorb needed cash.

    Now, anyone who has read the history of “Tulip mania” in Holland in the early 1600s should know better. At the height of that stock market bubble, some single tulip bulbs were bought for the price of a modest house! Of course, the inevitable collapse of that bubble followed quickly after the greatest height, because no single flower bulb has anywhere near that great an intrinsic, or objective, value.

    The lesson which should be learned by anyone who has read and absorbed the lesson of Tulip mania and other stock bubbles, is that people often make buying and selling decisions for emotional reasons, rather than rational ones. In fact, I submit buying and selling by individuals (i.e., everyone not using a computer program or algorithm to play the stock market) is usually motivated more by emotion than rational decision. I find it notable that when reading comments from investors on why they bought or sold a particular stock at a particular time, they generally describe their decision in emotional terms: “I liked this stock” or “I had a bad feeling and decided it was time to sell.” Now, if you bring this up with them, they’ll deny it; they’ll claim that they had some rational reason for choosing to buy or sell at that time. They are deluding themselves; this is part of the myth, the self-delusion, the groupthink that stock investors have talked themselves into believing; the delusion that stock prices are based on objective reality and rational analysis.

    Anyone wishing to understand the daily, weekly, and monthly seemingly semi-random movements of stock prices would do well to study how schools of fish move. The majority of the school is generally moving in the same direction, altho always with a few moving, seemingly at random, in other directions. Sometimes when one changes direction, the other fish nearby will change directions to match it. This starts a cascade event where the change of direction moves with startling speed throughout the entire school, so that the group is now headed in a different direction.

    Now, pick an individual fish and a moment in time. Is the direction in which that fish is swimming at that moment, subject to rational analysis? Probably not. At any time, most of the fish are swimming in a particular direction just because the fish around it are headed that way. So it is with the stock market. Most often an investor values a stock, including buying and selling decisions, just because he sees investors similar to him doing the same. But just as with that school of fish always having a few headed in other directions, some investors will decide to buy at a higher price, or sell at a lower price, than others, for any of a wide variety of reasons: he’ll buy because he recently read about the stock and got a “good feeling” about it, or he’ll sell because he’s having a cash flow problem and needs the cash, or because for some reason he started worrying about the price of that stock going down.

    When individuals buy stock above the average market price or sell it below market price, other investors may take note, and just like the fish in the school, may quickly move to follow. However, if you ask them, they’ll claim to have a rational reason: “Well, I figured that guy must have known something I didn’t, so I decided to jump before everybody else did.” And this may start a cascade effect.

    * * * * *

    Understanding that the movement of stock prices are semi-random and often subject to emotional decisions rather than rational ones, does help us understand why the price of Tesla stock is so volatile; why it rises and falls with such rapidity, often or usually for no rational reason. But it doesn’t explain why TSLA consistently remains at a value so much higher than what analysts say it ought to be.

    Stock shorters claim that TSLA is an example of a bubble, altho one which stubbornly refuses to collapse. Perhaps the “shorters” have convinced themselves that the stock will collapse soon, so they doggedly stay invested in what by any rational strategy should only be a short-term investment, despite the fact they lose money every time there is a “short squeeze”.

    Not being an investor myself, I won’t claim to have any special insight into why anyone would buy into a normal, or “long”, investment in TSLA, when the price is apparently so inflated. The usual answer given is that TSLA is a “story stock”; that is, there is a compelling and interesting story for the company behind the stock. In this case, it’s the optimistic view of the future represented by Tesla’s mission statement, and CEO Elon Musk’s visionary and optimistic view of the future. Of course, if that’s actually why people are investing, then it’s very much an emotional rather than a rational investment.

    Naturally a TSLA buyer, just like all stock buyers, will try to rationalize his buying decision. “It’s because Tesla’s market is expanding. They could grow to be the biggest auto maker in the world, plus they have other markets, such as selling batteries to the stationary energy storage market, and their new solar roof tile product.” Yeah, all that is true. But betting that Tesla Inc. will actually expand its market enough to justify the current “market cap” (total value of its outstanding stock at today’s stock price) is betting against the odds, and the odds are pretty long. Could Tesla actually grow to a size that would justify its current market cap? Sure, it’s possible. But even if that happens, it won’t be for years. Buying TSLA at its current market value, or anything close to that, isn’t a rational investment decision.

    DISCLAIMER: All this is, of course, just my opinion. Furthermore, I have only limited knowledge of the stock market and financial matters; I’m very far from an expert. Hopefully regarding what I’ve written, my opinion is an informed one, but still it’s only one person’s opinion. Hopefully nobody out there is going to be foolish enough to make any investment decision based only on what’s said in one anonymous comment on the Internet. Any individual’s investments should fit his or her own needs. If you take any one thing from what I’ve written here, it should be that you, personally, should not be like one of those fish in the school. Ignore your feelings, and ignore what other investors are doing on any individual day. Stock investors don’t make money by following the crowd; they do it by bucking a trend. So buck the trend by making your investments rationally, rather than emotionally.

    1. Mister G says:

      The gun industry fits your rational perfectly. Gun manufacturers share price is down due to Trump win, background checks are down due to trump win. If a Democrat would’ve won gun shares would be up, but it is all based on irrational beliefs by Americans lol.

    2. ffbj says:

      For someone who is not a stock investor themselves, you have a lot of advice on investing.

  11. pjwood1 says:

    Quite a bold statement:
    “As James Ayre of CleanTechnica* recently wrote, “in the imaginary world of finance…nothing seems to be correlated to what happens in the real world in any substantial way…”

    …as I sit trying to judge the quality of assets in Westinghouse’s bankruptcy estate. I can listen to the imagination of the lead creditors as they want to keep things going, or see if the quantified power need, or break-even cost to cheaper alternatives, makes it more likely another creditor is about to abandon. I “imagine” the answer cuts at something “real”, called risk.

    Anybody can buy TSLA. That has put its price in a range where nobody can really justify it, yet some are still tasked with targeting how far, and which way, it will go based upon more quantifiable things.

    1. pjwood1 says:

      ..don’t shoot the messenger.

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