Energy News Beat Publishers Note: This is an excellent summary from DRW on the world wide phenomena of EV investments. Tesla is capturing significant market share from all of the EV manufactures and is making a lot of people wealthy.
To consider “a company” – “their stock” would be incorrect. I hope this is obvious, but I wanted to say it out loud to kick off today’s post because, to tell the tale of Tesla, one must differentiate between Tesla: the company and Tesla: the stock.
I don’t know where you were the first time you met someone who you would describe as a member of the “Tesla” cult, but I remember my first time like it was yesterday. My friend “Mike” had just bought one, and after driving and owning it, he was all in. I mean ALL IN. He sold his oil and gas holdings including his interest in his operating company; he declared peak oil was close; and that Tesla was the single greatest car he had ever owned; he bought a Chevy Volt; and he bought A LOT of shares of Tesla. I had heard of Elon Musk and this car company but you hardly saw the cars anywhere, and I dismissed the discussion.
Flash forward about 3 years and after losing touch when our kids stopped playing soccer together and not both working in oil and gas anymore, Mike and I did lunch and caught up. I asked him how his Tesla was doing. He was even more glowing. Amazing in the snow. Could haul things. So much power! You could surf the internet and it uploaded updates for the car through the air. Better yet, his operating costs were so low when it came to maintenance “You won’t believe this but their drivetrain only has about 17 moving parts compared to the 200 or so in a typical drivetrain for an internal combustion engine (ICE) vehicle” (he referenced it and everything…)”. Ok. I have to see this car. We left Earl’s on 16th street and we took the car for a spin. I’ve got to admit, it was pretty amazing. “You still own the stock?” I asked. “Yeah, the short sellers hate it but they are going to get crushed.”
Since January 11, 2020, Tesla stock is up 706%. It has been added to the S&P. It’s cult following is, quite frankly, rivaled only by Apple in the early days and in the roughly 3 years wince that conversation, the stock is up more than 1,800% and the stock has a market cap of $769 billion. In the US, there are 4 companies that are bigger: Apple, Microsoft, Amazon and Alphabet (Google). It just passed Facebook at $730 billion.
Want to guess where Tesla sits in terms of revenue over the last 12 months? 261st. Incidentally, Subaru has slightly more revenue at $28.22 billion and Enterprise Products slightly less with $28.16 billion. The market cap of Subaru is $15.44 billion, which makes it the world’s 1,061st most valuable company by market cap. Facebook, who Tesla just passed in market cap has $77 billion in revenue and is 78th. Toyota has $248 billion in revenue, a market cap of $214 billion and is the 39th most valuable company in the world.
So, when I say you have to take “Tesla, the stock” totally separately from “Tesla, the company”, that’s why. Subaru trades at roughly 50% of revenue. Toyota trades at 86% of revenue. Tesla… it trades at 2,727% of revenue. So when people say “But Tesla is SOOOOOOO MUCH MORE THAN A CAR COMPANY…. that’s why.”
This isn’t a take down of Tesla, the stock. Or Tesla, the company. I’m openly asking a question… how can a company rationally trade at 2,727% of revenue when EVEN IF it sold as much as Toyota, who trades at 86% of revenue, it would still trade at 310% of revenue. Honest question. Translate that. If Tesla grows revenue at 30% a year for 12 consecutive years and the market cap doesn’t grow, it would take 12 years to match Toyota’s valuation. Extrapolating on car sales, that would mean growing from 500,000 cars a year to 11.6 million and selling cumulatively 48.8 million cars.
Next, let’s look at the the impact of inclusion in a major index, such as the S&P 500. In order to be included in the S&P 500, a company must achieve 4 quarters of profitability. Tesla, having achieved that and being the 5th largest company in the US, was added December 21, 2020. You may ask: why is this relevant to the stock price? Because all passive ETFs that mirror the S&P index MUST OWN IT REGARDLESS OF VALUATION. Even after a 7% pullback yesterday, it’s still up 25% since it’s inclusion (as an aside, this is one of the reasons Exxon being pulled from the Dow was a problem…. passive investors in DJIA ETFs have no choice but to own it).So finally, let’s look at Tesla’s financials. Much has been written about Tesla financials and I won’t belabor them here… but here’s an article from Newsweek that’s a good starting point (and you know how much I trust media so DO YOUR OWN WORK AND NOT INVESTING ADVICE ETC ETC) but here are some excerpts of interest from the most recent 10-Q.
Total book value of Tesla: (assets – liabilities) $16.03 billion.
Total revenue from auto sales in Q3: $8.771 billion and includes $397 mm of “automotive regulatory credits” which are defined as
In connection with the production and delivery of our zero emission vehicles in global markets, we have earned and will continue to earn various tradable automotive regulatory credits. We have sold these credits, and will continue to sell future credits, to automotive companies and other regulated entities who can use the credits to comply with emission standards and other regulatory requirements. For example, under California’s Zero Emission Vehicle Regulation and those of states that have adopted California’s standard, vehicle manufacturers are required to earn or purchase credits, referred to as ZEV credits, for compliance with their annual regulatory requirements. These laws provide that automakers may bank or sell to other regulated parties their excess credits if they earn more credits than the minimum quantity required by those laws. We also earn other types of saleable regulatory credits in the United States and abroad, including greenhouse gas, fuel economy and clean fuels credits. Payments for regulatory credits are typically received at the point control transfers to the customer, or in accordance with payment terms customary to the business.
Total net income in Q3: $369 mm
The point? Tesla generate more revenue from the sale of regulatory credits than they make in income, and they acknowledge in their releases that the EV credits will drop over time. More broadly, their profitability is enabled by government demanding car companies purchase credits to meet emissions standards…. who are now actively trying to build EVs. Layer in that their inclusion into the S&P has further increased their share price 25% at a time when the federal reserve is injecting so much liquidity into the system to offset the fact that most consumers can’t afford $100,000 electric vehicles, on an electric grid that can’t support a full conversion to EVs and it’s concerning.
But, since the economy runs on fairy dust and unicorn tears, hope is a plan and valuation is irrelevant.
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