July 22, 2020 / 9:33 PM / 18 days ago

Breakingviews - Tesla’s wacky valuation has a link to reality

Tesla Inc CEO Elon Musk speaks at an opening ceremony for Tesla China-made Model Y program in Shanghai, China January 7, 2020. REUTERS/Aly Song

NEW YORK (Reuters Breakingviews) - Tesla investors have put the hopes for a world of electric vehicles almost exclusively on Elon Musk’s shoulders. His Palo Alto, California-based car company, which reported a $104 million second-quarter profit on Wednesday afternoon, is close to topping $300 billion in market capitalization, leaving the company accounting for around a third of the entire industry’s stock-market value. As wacky as that is, it does have a link to reality.

At its current stock price, Tesla is trading at 97 times estimated 2022 earnings, according to Refinitiv data. That implies shareholders expect the company soon to be selling millions more cars a year than the fewer than 400,000 it delivered in 2019.

The electric exuberance has rubbed off elsewhere: Rivian, which counts Amazon.com, BlackRock and Ford Motor among its investors, has raised almost $4 billion since December; its SUV and pick-up truck are due to go on sale next year. Meanwhile, two early-stage rivals have just sold to special-purpose acquisition companies: A deal last week values Fisker, which wants to sell the “most emotional and sustainable vehicles,” at $2.9 billion. Nikola, which closed its SPAC merger last month, is now worth $14 billion – almost as much as Nissan Motor, Peugeot owner PSA and Fiat Chrysler Automobiles.

There’s logic to what Tesla’s valuation, especially, says about the prospects for electric cars. Assume the number sold globally grows by a third each year from 2.2 million in 2019. Markets like China have actually been growing far more quickly. Falling battery prices, tighter vehicle-emissions rules and more charging stations will help, too.

It would mean around 12 million electric cars are sold in 2025. Factor in an average price of $30,000, a generous 12% pre-tax margin, a 25% tax rate and a multiple of 18 times earnings for a more mature but still growing market, and that’s $590 billion of total shareholder value to the entire market for electric vehicles. Apply a 10% annual discount rate and that’s $350 billion today, just $30 billion more than the value public or private investors have ascribed to Tesla, Rivian, Nikola and Fisker combined.

Trouble is, investors are assuming those four have a virtual lock on the market. Yet traditional carmakers are investing hundreds of billions of dollars in electrification and account for most of the 200 different models due to come to market over the next five years. Investors will need to switch their ride in the middle of the race.

Breakingviews

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