What To Make Of Tesla’s Unique Market Cap

MAR 30 2017 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.”

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*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 Comments on "What To Make Of Tesla’s Unique Market Cap"

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leafowner

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

Thomas

????
The joke of the century

Cavaron

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

mx

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.

Mark

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.

CDAVIS

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.

ffbj

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.

Clayton

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.

Clayton

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)

Clayton

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.

philip d

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!

Clayton

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.

CDAVIS

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.

Clayton

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

Clayton

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.”

Clayton

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.

CDAVIS

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.

Clayton

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?

Clayton

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.

Clayton

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.

Clayton

How the market values* the shareholder equity.

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

Spider-Dan

AFAICT, no edits for anyone but staff.

/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.

mx

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

Clayton

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.

Clayton

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.

(⌐■_■) Trollnonymous

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

DJ

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.

(⌐■_■) Trollnonymous

“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.

speculawyer

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)?

ffbj

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.

speculawyer

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

Kdawg

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

speculawyer

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.

Martin Winlow

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.

Kdawg

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

Another (Euro) industrial point of view

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.

speculawyer

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

In Elon we trust.

ffbj
Daniel

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.

Pushmi-Pullyu
“…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… Read more »
Mister G

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.

ffbj

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

pjwood1

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.

pjwood1

..don’t shoot the messenger.