Tesla Doubters Are Now the Ones Detached from Reality
It’s time to recognize Tesla’s valuation might be justified
Tesla is worth $1.1 trillion. As if to reward investors for the company’s Q3 performance along with a new deal to supply Hertz with 100,000 electric vehicles, the company’s share price sped past $1000 last week to end the week over $1100. Many believe Tesla is wildly overvalued. As a long Tesla investor since 2018, I too have wrestled with its valuation recently. Only four U.S. companies are worth more, Apple, Microsoft, Google, and Amazon. However, I now realize that traditional metrics of valuing a company like Tesla do not apply. Tesla investors are valuing the company based on where the automotive industry is headed, not where the automotive sector exists today.
Consider that every automaker today is striving to be part of a future automotive landscape being created primarily by Tesla. Automakers have announced a total of $33o billion in electric vehicle and battery investment over the next five years. Clearly, legacy automakers are investing to go where Tesla has already traveled. In fact, all automakers (legacy or new entrants) have a primary goal of beating Tesla. Thus, those valuing Tesla based on comparative metrics to General Motors, the VW Group or Toyota ignore how the future automotive landscape might look in 10 years. They’re valuing Tesla based on where the “automotive puck” exists today, not where that puck will be located in 10 years.
“Never underestimate the man who overestimates himself.” Charlie Munger response to a question about Elon Musk
The Third Quarter Tells An Incredible Tesla Story
Tesla delivered slightly over 241,000 vehicle globally in the third quarter, 73% higher than the previous year. This type of sales growth is the very definition of a company that is scaling. Scaling is exponential growth versus growth that is linear. Remember, this growth occurred during an environment of COVID-19 supply chain disruptions impacting every industry, including most global automakers.
Tesla financial performance in the third quarter was impressive as well. Its automotive revenue was $12.1 billion in the quarter, a 58% increase over the prior year. The company’s gross margin was 30.5% versus 27.7% last year. In the automotive space, a 30% gross margin would be a dream accomplishment for any volume automakers. Gross margin for the VW Group was only 17.4% in 2020; 17.6% for Toyota; and 15.3% for General Motors.
Tesla Margin In The Design Of The Car
A lot goes into establishing top-line margin like Tesla is experiencing. Some of this margin advantage is found in the design decisions made by by the company which has nothing to do with electric vehicles having better margins than internal combustion engine vehicles.
The images above are interior comparisons of a 2021 General Motors produced Cadillac CT5-V sedan on the left, and a 2021 Tesla Model 3 Performance sedan on the right. Both vehicles are similarly priced at nearly $68,000. Notice the two screens used in the Cadillac (the screen behind the steering wheel, and a screen in the center used for infotainment). Tesla uses just one large touch screen in the Model 3 that is centrally located in the vehicle. The one center screen in the Tesla is probably less costly than the combined cost of the two Cadillac screens. The Tesla screen is surely more efficient to install during the vehicle assembly process, which helps improve manufacturing costs as well. Imagine the combined cost of the many buttons, knobs, and switches on the center dashboard of the Cadillac and on the vehicle’s steering wheel. The Cadillac has a joystick for operating the transmission mounted on the center console as well as a click-wheel used to control the center screen. The click-wheel is a redundant feature given that the Cadillac screen is also a touch screen. Much of the Tesla interior functionality and all of the infotainment are controlled by the center screen which reduces material cost while improving manufacturing costs as well. While I personally prefer the usability of the Cadillac interior, buyers of the Model 3 are clearly voting with their wallets proving that the Tesla interior works for them. Through the end of the third quarter, Tesla sold 94,900 Model 3’s in the U.S. this year; Cadillacs sold 7,636 CT5 sedans over the same time.
Decisions like the design of the interior are driven by leadership. Leadership matters for companies. Companies are not just a collection of people trying to do the right thing. Companies are driven by the strength of its leadership. For Tesla, Elon Musk matters a lot. Every time I’ve thought about completely eliminating my position in Tesla because I believe the stock is overvalued, I remember Charlie Munger’s response to a question about Musk. “I would never buy [Tesla], and I would never sell it short,” Munger said. He continued, “Never underestimate the man who overestimates himself. I think Elon Musk is peculiar and he may overestimate himself, but he may not be wrong all the time.”
I do not believe the future of the automotive landscape will be a zero-sum game, with Tesla winning and all others losing like many Tesla investors assume. Markets are never dominated by only one company. The automotive sector will be no different. But Tesla is winning today, and rapidly creating what that future will become. The company is aggressively growing into its lofty valuation.
Adam Jonas of Morgan Stanley recently explained his revised $1,200 Tesla price target for Tesla. “The Tesla you see today is the product of pre-COVID, sub $100 billion Tesla. The Tesla you’ll likely see over the next 12 to 18 months would demonstrate the capabilities of the trillion dollar Tesla, emphasizing step-change in manufacturing, cost reduction…expansion in capacity, model lineup and services offerings.
We all should be critical of companies like Tesla. We all should refrain from becoming part of any Tesla group-think. Eventually, however, acknowledging Tesla’s accelerating performance causing the entire global auto sector to revise business strategies should cause the Tesla-doubters to take note.
TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience, and are intended as educational material. Although best efforts are made to ensure all information is accurate and up to date, occasionally unintended errors may occur.
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