Opinion: Tesla needs ‘Apple profit’ and ‘Volkswagen’s revenue’ to justify its market value

Tesla has one foot in the automotive industry and the other in technology. But when it comes to the company’s market capitalisation, it’s not appropriate to say it’s a car company or a technology company alone. Analysts say Tesla needs Apple’s profits and VW’s revenue to justify its market value. The stock’s heat has begun to drop as optimism has given way to caution.

Tesla’s share price has seen a shock rise in recent days, doubling in the first 23 trading days of the year alone, due to record car deliveries, the opening of a Chinese super factory and a earlier-than-expected profit at a joint-operated battery plant. But the rapid rise over the past five weeks has prompted more comparisons between them and high-growth technology companies, and even market watchers who focus on technology stocks are starting to pay closer attention to the stock’s fundamentals.

“As Tesla’s stock rose from an extraordinary $180 last year to nearly $1,000 last Tuesday, we received more and more analysis from technology portfolio managers and analysts,” Morgan Stanley analyst Adam Jonas wrote in a note. Their analysis has shifted from the traditional industrial/automotive industry to Tesla. “

On Thursday, the stock was volatile again, reversing early losses and closing up 1.94 percent. It comes after two Democrats in the U.S. House of Representatives introduced legislation to create a national network of electric vehicle charging stations. With Republicans in control of the Senate, the measure is unlikely to pass in an election year.

Opinion: Tesla needs 'Apple profit' and 'Volkswagen's revenue' to justify its market value

It’s unfair to compare with traditional car companies.

Tesla’s market value hovered around $132 billion after Wednesday’s plunge, trading at about five times earnings, compared with 0.4 times for GM and 0.2 times for Ford. Both Toyota and Volkswagen are trading at less than twice the price-to-earnings ratio. But bulls say it’s unfair to compare them to traditional automakers, pointing out that technology companies are Tesla’s real peers.

“In the market’s view, Tesla seems to have gone far beyond comparisons with traditional car companies, ” Jonas said. “While Tesla’s market capitalisation is an order of magnitude higher than that of its car peers, he says, “we think it’s largely well-deserved – Tesla is a much faster-growing car company, and it’s not just a car company.” “

However, if Tesla is compared to the more diversified NASDAQ 100, its share price is currently unaffordable. On average, the index’s member shares trade 6.28 times its revenue and 36.5 times its profit, meaning Tesla needs $4.6 billion in annual profits to justify its market value. The price-to-earnings ratio of the NYSE Fang plus index component, which focuses on technology stocks, is 50 times.

Tesla can’t measure it on a comparison price-to-earnings ratio because it hasn’t made a profit on a GAAP basis for four consecutive quarters. On an adjusted basis, it has been profitable in the past two quarters.

“Tesla’s price may be $900, but it needs revenue like VW’s, apple-like profit margins,” said Aswath Damodaran, a professor at New York University’s Stern School of Business who specializes in market capitalisation. Reinvestment is also needed, as any other manufacturing company in history has. “Tesla may have succeeded in doing one of those things, but taken together, its story collapsed. “

“It’s definitely a bubble.”

Tesla reported an annual loss of about $862 million in 2019 on a GAAP basis. Wall Street analysts on average expect the company’s net profit to reach $4.9 billion in 2023.

“Tesla’s share price is now more than double that of Daimler and three times that of BMW,” Craig Irwin, an analyst at Roth Capital, said in an interview. To me, it doesn’t seem to make much sense. “

The debate boils down to whether Tesla is years ahead of other automakers in the race for electric cars — and even a decade ahead of other automakers. “It seems that the market has decided that it is leading for more than a year or two, ” says Mr Owen. “

Brian Johnson, auto motive analyst at Barclays, said: “Tesla’s recent price moves are reminiscent of the NASDAQ around 1999. He said the recent price spike opened up the possibility of raising capital at low cost, reducing the likelihood of business stagnation, but Tesla’s market value was still fundamentally overvalued.

Tesla’s volatility over the past few days is reminiscent of Qualcomm’s similar performance. About 20 years ago, the stock soared 360 per cent in five months. After hitting a high of $100 in early January 2000, the stock began to narrow its gains. It is only now, about 20 years later, that it has come back to these levels. Qualcomm traded near $88 on Thursday after it reported disappointing second-quarter chip shipments.

“The whole thing looks ridiculous, it’s the craziest thing since 1999. Brad Meikle of Williams Trading said. He is one of Wall Street’s most pessimistic analysts of Tesla. “It’s definitely a bubble. “