Tesla Motors is the most opaque and rocky story of success and failure; really it’s a drama that you want to end well, but have this nagging feeling it won’t. The company’s 2019 Q4 earnings call provided a boost to cheerleaders and more burning money for founder Elon Musk. (As of market close Thursday, the stock is trading at $640.81, up $59.82 or 10.3%, and still rising in after-hours. This makes me happy, as I started buying at $189 back in May 2018.)
Right now, Tesla’s market cap is $115.5 billion. To put that in perspective, Ford plus GM plus Honda is about $130 billion, combined. Honda sold as many vehicles as Ford and GM combined: 5.3 million, so those three companies together sold 10.6 million vehicles in 2019. Tesla sold 367,656, total. This values Tesla at $317,792.39 per vehicle sold in 2019. Something is clearly wrong here.
But let’s start with what’s right.
- Tesla made money. For the second quarter in a row, the company remained profitable, in both GAAP and non-GAAP earnings. And this time, without any funny accounting tricks like recognizing sales of carbon credits. Many analysts see this as a validation of Tesla’s business model to grow the business and its capacity as the undisputed leader in electric vehicles.
- Tesla generated lots of free cash flow. They did this from operations, not from accessing the public markets or issuing new and risky debt. In the 4th quarter 2019, the company generated over $1.4 billion in operating cash, and invested $412 million in capital expenditures, less than last year. This is considered good news when looking at liquidity and ability to grow.
- Tesla delivered more vehicles and expanded worldwide manufacturing capacity. They claim a 400,000 (soon, 500,000) vehicle manufacturing capacity for the Model 3/Y in Fremont, and 150,000 vehicles in Shanghai. They are building a new facility outside of Berlin, Germany to access European markets. This means they can continue to produce and sell vehicles without enormous investments in capital expansion. In fact, at full production, Tesla could hit a million vehicles a year in just a few years. This puts them somewhere north of Subaru, which sold around 700,000.
- Tesla has continued innovation and leadership in energy efficiency, power train/speed, software, and self-driving AI. Of course, this is the biggest “if” and also the source of most of the “wow” by investors.
But Tesla is a dog with some fleas. Their hyped up Cybertruck hit many consumers like Howard the Duck hit theaters. The full self driving has been mocked online and despite 3 billion miles of “neural net” driving, hasn’t reached the stage where it can be fully trusted to run, say, a network of robotaxis. It may never get there–we don’t know because that’s uncharted territory where no AI has gone.
And remember, there are other manufacturers out there pursuing the electric market: Porsche, Audi, VW, Mercedes Benz, and that’s just the Germans. Ford is introducing their Mustang Mach-E. Honda, Hyundai, and Kia make very good hybrids, plug-in EVs (PHEVs) and short-range battery EV’s (BEVs). Tesla only makes rather expensive BEVs, that you can’t take from point A in Enterprise, Alabama to point B in east Texas without planning some kind of supercharger stop, which may or may not be “on your way.”
Also, Tesla has no dealers, so you have to buy it from them and them alone. They’re not the best at selling, but they do a good job letting people who already want a Tesla learn about the car and drive one–if you happen to live in a place with a Tesla showroom. I happen to live a mile from one, but most people don’t.
All of that adds up to a love story. Because a share price chasing $700 doesn’t add up in the long term, unless Tesla owns the entire planet in a decade. Musk kicked off the earnings call with a question: “Where will we be in 10 years?” As Liam Denning at Bloomberg notes:
As of Wednesday evening, the consensus forecast has Tesla flipping from a net loss of almost $5 a share last year to a profit of almost $2.40 in 2020 and then growing at more than 100%, compounded, through 2023. Looking out 10 years, I wondered what sort of earnings Tesla would need in 2029 to justify its stock price, assuming its terminal value in that year accounted for half the current market cap. At a 10% cost of capital, it works out to just over $200 per share — or an 86-fold increase versus 2020’s (forecast) earnings.(1)
How many companies have $200 EPS? Let’s not ask that, but let’s instead look at the Leviathan of all leviathans: Apple. If you invested $220 in 1980 after the company’s IPO for 10 shares (Forrest Gump, anyone?), with all the splits, you’d have been worth $112,268.80 in August, 2018, not including dividends. To justify Tesla’s stock price today, the company, in 40 years, would have to be worth about 10 times Apple.
Tesla would literally own the planet–and probably have a good stake in Mars. To Elon Musk, I have to tip my hat and say, good luck shooting for that goal. To the Tesla lovers in the drama, I’ll only say that infatuation feels great, until it doesn’t.