What should Musk do to justify Tesla’s valuation? Apple’s Profits, VW’s Revenues

Beijing time on February 7th, Tesla has always set one foot in the car world and the other in the technology world. But when it comes to Tesla’s valuation, it doesn’t really fit into both industries. Tesla’s soaring share price has finally cooled as the market frenzy has been replaced by caution.

Tesla’s shares have doubled in the first 23 trading days of the year, driven by record car deliveries, the opening of chinese factories and early profits from a joint venture with Panasonic’s battery plant.

However, Tesla’s soaring share price over the past five weeks has prompted analysts to compare it more to high-growth technology companies, and even market watchers focused on the technology sector are increasingly concerned about Tesla’s fundamentals.

“As Tesla’s share price jumps from $180 last year to nearly $1,000 on Tuesday, we’re getting more and more calls from portfolio managers and analysts in the technology industry. They had previously focused on the traditional industrial/car market and are now looking at Tesla. Adam Jonas, an analyst at Morgan Stanley, said in a report.

Tesla’s share stake fluctuated again on Thursday. Tesla’s shares reversed an earlier decline and ended up 1.94 percent after two House Democrats introduced legislation to build a nationwide network of electric vehicle charging stations. The legislation is unlikely to pass this year because of this year’s election year and Republican control of the Senate.

High valuations, far more than traditional auto giants.

After Wednesday’s sell-off, Tesla’s market value hovered around $132 billion, with a market able-to-sell rate of about five times, well above GM’s 0.4 times and Ford’s 0.2 times. Even Volkswagen has less than twice as much market likes. However, Tesla’s optimists argue that it is unfair to compare Tesla with traditional carmakers, and that technology companies are Tesla’s real peers.

“In the eyes of the market, Tesla seems to have reached a position that traditional car companies can’t match,” Jonas said. Tesla is a much-watched, faster-growing car company, and it’s not just a car company. “

However, when Compared with the more diversified NASDAQ 100, Tesla’s current share price is not up to a beat. The Nasdaq 100 index has an average market-to-earnings ratio of 6.28 times and an average price-to-earnings ratio of 36.5 times. That means Tesla’s annual profit would be $4.6 billion if it were to prove its market capitalisation. The average price-to-earnings ratio of the technology-focused NYSE FANG plus index is 50 times.

Since Tesla has yet to deliver four consecutive quarters of profit under The General Accounting Principles (GAAP), it is not yet able to measure its comparable price-to-earnings ratio. Over the past two quarters, Tesla has been profitable on adjusted terms.

Apple’s Profits, VW’s Revenues

Aswath Damodaran, a professor at New York University’s Stern School of Business, specializes in corporate valuation. “Tesla’s share price may be $900, but it needs to generate revenue like Volkswagen’s, Apple’s profits and scale more than any other manufacturing company in history,” he said. “

Mr. Damodaran thinks Tesla may succeed in doing the same, but taken together, it’s a crazy Green call story.

According to GAAP, the company reported total revenue of $24,578 million in 2019 and a net loss of $862 million. Wall Street analysts on average expect Tesla to reach a net profit of $4.9 billion that it has valued until 2023.

What should Musk do to justify Tesla's valuation? Apple's Profits, VW's Revenues

Apple’s annual profit trend

That compares with $26,174 million in revenue and net profit of $55.256 billion for fiscal 2019. Volkswagen Group’s fiscal 2018 sales were 235.8 billion euros ($259 billion) and operating profit was 17.1 billion euros ($18.8 billion).

“Tesla’s market capitalisation is more than twice that of Daimler and BMW’s three times that,” Craig Irwin, an analyst at Rossecurities, said in an interview. “

The industry’s debate is over whether Tesla has the advantage of being ahead of other automakers in the race for electric cars for years, if not decades. “The market seems to think that Tesla’s lead is much more than a year or two. Irving said.

“Absolutely a bubble.”

“It’s not a mockery of the young investors who are courting Tesla, but recent stock market moves are reminiscent of the 1999 Nasdaq rally. Brian Johnson, an automotive analyst at Barclays, said. He argues that the recent stock market rally has created the possibility of low-cost financing and reduced the chances of business stagnation, but Tesla is still fundamentally overvalued.

The volatility of Tesla’s share price over the past few days is reminiscent of Qualcomm’s similar performance nearly two decades ago. At the time, Qualcomm’s share price had soared 360 per cent in five months. Qualcomm began to bounce back after hitting a high of $100 in early January 2000. It wasn’t until about 20 years later that Qualcomm’s share price was back close to $100. Qualcomm shares closed down $90.61 on Thursday after posting disappointing second-quarter chip shipments.

“It all seems ridiculous, it’s the craziest since 1999,” said Brad Meikle, an analyst at Williams Trading, an institutional securities broker who is one of Wall Street’s most bullish analysts at Tesla. “