Although many investors wouldn’t agree with me, I believe that one of the main aberrations in the U.S. stock market is the fact that Tesla Inc (NASDAQ:TSLA) is worth the same as General Motors Company (NYSE:GM), despite the huge differences between them in terms of revenues, profits, margins, market share, operational aspects and financial strength. Tesla is no more than an expensive punt on promising future prospects, while General Motors is a cheap bet on a profitable reality.
Trading on less than 6x earnings, General Motors seems like a cheap stock to hold. The same can’t be said about Tesla’s stock, which trades on more than 115x its 2018 projected earnings. At such high prices Tesla seems like an epic short for all investors that have their feet on the ground. Luck has been tilted in favour of Elon Musk, who seems to be supported by governments and investors without ever turning a profit.
That’s really something, I must admit. But I would be worried by holding shares that are inflated by ‘potential’ alone. When the market turns more bearish (and it will), Tesla’s stock will be battered down to earth. Years after its inception, Tesla is still unprofitable and relatively small, but Musk continues to be able to raise money and pour it into the project. When that happens, one has to scratch one’s head and ask whether the extra money really is to expand the business or to obfuscate the current reality.
A stock-market darling
Tesla has been a great success story in terms of stock market valuation. Its IPO occurred on 29 June 2010, when Musk was able to issue 13,360,000 shares of common stock at a price of $17. The nascent environmentally friendly company, which designs, develops, manufactures and sells electric cars, electric vehicle components and energy storage systems throughout the globe, was worth an investment, as the world was increasingly turning to green energies as an alternative to fossil fuels.
Tesla seems like an epic short for all investors that have their feet on the ground.
The company quickly became a stock-market darling, as everybody wanted a share of its promising future. Its share price rose by almost 18x, from $17 to $303.70, providing investors an annualised return of 53.1% during a period of almost seven years. During the same period, the whole auto-making industry registered a flat performance. As of today, Tesla’s market cap is $49.5 billion, which is almost equal to General Motors’ $51.3 billion valuation and Ford’s $45.2 billion market capitalisation. In the Nasdaq 100 index, Tesla is at par with Yahoo, Nvidia, and Biogen.
Not so bright fundamentals
But if we replace share prices with fundamentals, the story behind Tesla changes somewhat. Tesla’s financials don’t show a single year of profits, nor even a positive operating income. Revenue is growing very quickly, but so is the cost of that revenue, which when mixed with rising general expenses, is depleting shareholders’ capital. Were it not for the extra cash raised, Tesla would by now be bust.
I understand that some businesses take time to evolve and that investment is about having the patience to wait for the reward. Tesla invests in a new type of car that will take some time to be developed and marketed. There’s nothing wrong with the business model and there’s nothing wrong with waiting for it to work out. But the fundamentals behind the business don’t currently justify the hype. A superficial look at financial statements and key stats are enough to show how insane Tesla’s current valuation is.
Insane valuations always end badly
As I mentioned above, the market capitalisations of Tesla and General Motors are similar, such that one would need roughly the same amount of money to acquire the full outstanding common stock of each company. But there are some big differences between them.
Tesla has yet to make a profit and has accumulated losses (in the form of retained earnings) of around $3 billion during its business life. In contrast, General Motors made $9 billion in profits last year. Tesla made a gross profit of $1.6 billion on revenue of $7 billion last year, while General Motors made $21 billion on $116 billion revenue. Tesla reported selling 25,000 vehicles during the first quarter of 2017, which was a significant increase on last year’s numbers but far below the numbers that would allow the company to produce in 2018 the 500,000 vehicles Musk has been promising it would (unless the company can raise production five-fold between 2017 and 2018). Another simple statistic shows that General Motors sold 10 million vehicles last year, which corresponds to 100x Tesla’s projected production for this year.
Without digging too much into the financial statements of both companies, these simple stats are more than enough to give an idea about the potential overvaluation of Tesla relative to General Motors. For Tesla’s stock to be worth the same as General Motors’ stock, one must believe that this company is going to experience a stratospheric growth. But its past inability to make a profit and its currently diminutive market share don’t point in that direction.
General Motors sold 10 million vehicles last year, which corresponds to 100x Tesla’s projected production for this year.
If we look at analysts’ projections for both GM and Tesla, we continue to be unable to justify the current prices. Analysts predict an EPS around $6.2 for GM and $2.6 for Tesla in 2018. If we look at how current prices fit on those predicted earnings, we again see a big discrepancy between the shares. GM trades on a tiny multiple of 5.53x while Tesla trades on a whopping 116.81x. I really don’t have the technical knowledge to understand how great Tesla’s advantage is relative to an established business like GM, but I do know that when prices become disconnected from intrinsic value such as they are now, we likely have a bubble that exposes investors to market downturns in a much more pronounced way than a P/E of 5.5x does.
To account for the extra growth Tesla may eventually experience (of which I am still not convinced), it could trade at a 25x to 35x multiple, which would imply a stock price of between $65 and $91. I would accept those figures (albeit with a grain of salt). But the current $300 price tag doesn’t allow for any sound investment.
There are only two things that occur to me:
First – Tesla’s shares are a short;
Second – GM shares are a buy.