by Clement Thibault
Tesla (NASDAQ:TSLA), the electric car and energy storage solutions manufacturer, is set to report Q4 '16 earnings on Wednesday, February 22, after US markets close. Wall Street is expecting the company to post a net loss of -$0.13 per share, on $2.2 billion in revenue.
During December 2016, shares of Tesla were trading for $180. Since then, the company's shares have rallied, beginning at the end of December on news that Panasonic (OTC:PCRFY) had inked a deal with TSLA to invest more than a quarter of a billion dollars in the manufacture of solar cells. Momentum continued to push Tesla to $280 which it reached on February 13; it's currently trading for $277. Astonishingly, Tesla shares gained more than 50% in just three months on minimal stimulus.
The company's market cap is now $43.8 billion dollars. Its TTM revenue is almost $6 billion, while its TTM EPS is negative 6.5 dollars.
Compare those numbers to Ford's (NYSE:F), a peer company valued at $50 billion dollars, just a tad higher than Tesla. The Detroit-based auto manufacturer's TTM sales are $151 billion with TTM EPS of $1.1. Big Three rival General Motors (NYSE:GM) has a $55 billion dollar market cap, still within Tesla's valuation range. Its annual revenue is $166 billion, on $6.1 dollars per share of earnings. See the discrepancy?
Perhaps two giant US auto makers that specialize in cars for 'regular Joes' are an inappropriate comparison. How about the more flamboyant Ferrari (NYSE:RACE), the very high-end luxury sport car manufacturer? It has a market cap of $12 billion on $3 billion in revenues and an EPS of $1.95 for the same time period. But, since Tesla is still heavily investing in capital expenditures, EPS numbers mean little. Still, on almost all metrics Tesla can't even compete.
Ford's P/E ratio is currently 10.9, while GM's is 6.2. Ferrari trades for 34 times its TTM earnings. Tesla has no P/E ratio since the company continues losing money.
For Tesla to even come close to other car manufacturers' valuations, at some point during its mature years it would need to earn about $25 dollars per share, or $4 billion in net income. At Tesla's current price per share, $25 of earnings per share would bring its P/E ratio to 10.9, the same as Ford's. Of course, these are all hypotheticals; we don’t believe Tesla will ever be held to the same standards as Ford, GM or other car manufacturers, even producers of cars as exalted as Ferrari.
Tesla may be inordinately famous for its cachet, but the reality is, it's not yet a well established company. Which means there's much about its actual capabilities that are still unknown.
Tesla's appearance in the marketplace initiated a stampede of automotive competitors rushing into the electric car industry. This will undoubtedly pressure Tesla's sales and margins going forward.
The company's Sparks, Nevada-based Gigafactory, which is essential for production of batteries for Tesla's cars, will only reach full production in 2018 at the earliest. According to the WSJ, Tesla routinely misses its own deadlines, and has failed to meet over 20 projections in the past five years. A current example: Tesla's Model 3, the latest catalyst for the company, will only start production in the middle of this year; roll-outs of the actual car won't happen till early 2018. Even without Tesla's own systemic problems, the potential setbacks to entering the mass car production arena are daunting, and countless.
What then is pushing Tesla's valuation and market cap higher and higher? We believe there are three reasons the stock, and company, remain a market darling:
1. Elon Musk
Many see the company's CEO, Elon Musk, as a real life Tony Stark, the fictional businessman/playboy better known by his superhero name – Iron Man. Musk began with almost nothing and earned his fortune when he founded a software company in 1995 with just $28,000. Just before the dot.com bubble blew up in 1999 he sold the company for $307 million.
Since then, the now-billionaire entrepreneur has displayed a taste for visionary ideas and high-end concepts as well as boundless energy. Musk founded SpaceX, an aerospace manufacturer and space transport services company, in 2002, with the intention of advancing space exploration. In 2011 he said his aim was to put a man on Mars within 10 years.
Musk was also chairman of and helped found SolarCity, a solar energy services company that was started in 2006 by two brothers who also happened to be Musk's cousins. Tesla formally acquired the company—characterizing it as a merger—for $2.6 billion last November. He also started OpenAI at the end of 2015 with $1-billion, a not-for-profit artificial intelligence company. Musk is also credited with the Hyperloop concept, a method of transportation that would propel passengers in a pod-like vehicle through a vacuum-like tube at speeds faster than airplanes.
The point is, the South African engineer who founded and heads Tesla is charismatic, dynamic and passionate about reducing global warming through sustainable energy production, which he has said can change the world as well as humanity. He's also a global celebrity and a cultural icon. Indeed, for some technology enthusiasts, Musk is nothing short of a god. He's a marquee name and Tesla is the major beneficiary.
2. Tesla: The Brand / The Car
There is no denying that Tesla itself has become a recognizable worldwide brand. Adjectives used to describe both the company and the car include luxurious, environmentally friendly, futuristic, even sexy.
Critics and consumers almost unanimously agree that Tesla's cars stand out. With their autopilot technology and sleek, futuristic design, they're nothing like their closest marketplace competitor, the utilitarian, boxy Chevy Bolt, even though on paper both cars are very similar.
Tesla managed to create and foster buzz around its cars, making the vehicles highly coveted by consumers, which in turn continues boosting the value of the stock. It isn’t difficult then to imagine investors buying into the fantasy of the stock in much the same way potential drivers keep buying into the concept of the car—regardless of whether Tesla can come through on mass production, not to mention actual product. For Tesla consumers and investors alike it seems the idea of being part of 'the future' may be more than enough.
3. The energy revolution
In part two of his master plan, Musk wrote:
We must at some point achieve a sustainable energy economy or we will run out of fossil fuels to burn and civilization will collapse.
For Musk, cars are just a small part of what he and Tesla are trying to achieve. The ultimate aspiration is to rid the world of polluting energy sources and replace them with clean, green energy.
Tesla's SolarCity acquisition reflects this mission, and together with the company's Powerwall, a home energy storage device, the goal is for homes to become self-sufficient for all their energy needs. This brief goes way beyond just cars; it's about revolutionizing the entire energy industry by disrupting global oil dependence and substituting it with solar power.
An energy empire run by a visionary emperor? For tech enthusiasts and the investors who believe in them, that could be worthy of a hefty valuation.
For those of us who live in the real world however, with the SolarCity integration still ahead and the Powerwall 2 only able to power an average two-bedroom home for just one day, Tesla is still years away from even pretending to be scaling energy empire status.
Conclusion
A high valuation for a potentially disruptive company is warranted. However, as we've said above, from an automotive perspective, Tesla brings little to the table—whether technologically or from a design perspective—that other automakers can't or won't bring to market within the next few years.
Which is why we continue to believe that Tesla, at its current price, belongs in the too expensive section of the equities market. Though we appreciate both Musk's value as a CEO and Tesla as a company, as investors we prefer to make decisions based on tangible numbers, not promises down the road.
Tesla has hit $280 several times before, for the first time in September 2014. Since then the company has been trading in a sideways range—and for good reason. Laudatory language and illusory promises can only take a stock so high. We expect little to change for Tesla during today's report and indeed most likely not until more information emerges about the true production time line of the Model 3, which probably won't be announced till sometime later this year.