What Elon Musk’s new title might mean for markets Or … Tesla’s share price, intrinsic value or market madness

In this article we discuss the valuation rationale for Elon Musk’s largest asset, Tesla.

Wednesday, February 3rd 2021, 9:07AM

by Richard Stubbs

On 7th January Elon Musk became the wealthiest man on Earth and Mars. This was in large part due to the astronomical rise in the price of Tesla shares that he owns.

Tesla is now worth $780bn US dollars and is the 4th largest company on US share market, behind only Apple, Amazon, and Microsoft. It is by far the most valuable automobile company in the world, the next most valuable being Toyota Motor Company at $240bn US dollars. An owner of all of Tesla’s shares could currently sell them and buy three Toyota Motor Company’s and have a handy chunk of change left over.

The table below compares Tesla to 3.2x Toyota Motor Companies. 3.2 Toyota Motor Companies would be producing 57x more cars, receiving 28x more revenue and have 57x more assets than Tesla.

Measure	Tesla	3.2x Toyotas	Difference
Market Capitalisation	$US 783bn	$US 783bn
Revenue	$US 28bn	$US 777bn	28x
Net Profit	$US 660m	$US 46.9bn	71x
Net Tangible Assets	$US 16bn	$US 599.2bn	36x
Units delivered in 2020	500,000	28,397,303	57x

Source: Bloomberg, Revenue and Net Profit based on year to 30 September 2020

Tesla is undoubtedly a great company. It is highly innovative, has a strong culture and is executing its strategy well. But there is a lot of work to do before it makes a level of profit and revenue that might justify its current share price. Tesla would have to grow its revenue nearly 40% each year for the next 10 years to get to the revenue of 3.2x Toyotas.

While Tesla is a great company, the automotive manufacturing industry is terrible. Automotive manufacturing is highly competitive. There are limited barriers to entry and there is low brand loyalty. This results in low profit margins and low returns on capital. History is littered with failures. Warren Buffett famously noted that “when a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

In competitive industries it is almost impossible to maintain a market share of much more that 20%. Toyota currently has a 10% global market share. 3.2x Toyotas would have over 30%. This just doesn’t look possible.

It is also likely that any shareholder of Tesla will need to front up with more cash over time, as Tesla will undoubtedly need more capital if it is to achieve the high levels of growth needed to justify its share price.

Perhaps the best rationale for Tesla's share price is the potential for it to diversify into other sectors given the highly innovative culture that exists there, a bit like how Amazon went from a book seller to the leading provider cloud services. Tesla is already more than a car company, and some argue it is better described as an energy distribution business. But non-car revenues currently only make up 10% off the total revenue.

We do not have a crystal ball at Castle Point and cannot tell you whether Tesla manages to achieve the lofty levels of growth required to justify the share price. But we can tell you that you are paying a lot now for the privilege of finding out.

To us Tesla’s recent share price rise looks more to do with over-exuberance in some segments of the market. Recent share trading in Tesla share has been extreme. On Friday 8th January it turned over $62bn worth of shares which was more than the next 10 stocks combined.

Perhaps Jeremy Grantham at GMO summed it up best in his recent newsletter where he compares some of the current market behaviour with the behaviour in 1929 before the crash. “As a Model 3 owner, my personal favourite Tesla tidbit is that its market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM. What has 1929 got to equal that?”.

Disclaimer

The following commentaries represent only the opinions of the authors. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement or inducement to invest. All material presented is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Castle Point may or may not have investments in any of the securities mentioned.

About Castle Point Funds Management Limited

Castle Point is a New Zealand boutique fund manager, established in 2013 by Richard Stubbs, Stephen Bennie, Jamie Young and Gordon Sims. Castle Point’s investment philosophy is focused on long-term opportunities and investor

alignment. Castle Point is Zenith FundSource Boutique Manager and Australasian Equity Manager of the Year 2019.

About Richard Stubbs

Richard Stubbs is a co-founder of Castle Point. He has a Master of Commerce in Finance and a Bachelor of Science from Auckland University and has published academic articles on long run returns in New Zealand.

Richard is the co-founder of Castle Point Funds Management. Previously he was Head of Equities for Tower Investments in Auckland.

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