So You Think Tesla is Same As Apple

Is Tesla stock overvalued?

I do not know.

Some think it is actually undervalued and believe the investors are nuts to dump the shares now. The argument for this extreme bull case has these 3 components:

  1. You should value based on what it can be, and not on quarterly earnings
  2. It is not just car business, it is a battery and solar business, add those up then the target addressable market is way high
  3. Tesla is like Apple in 2007, and the other car makers are Nokia/Blackberry of 2007.

Let us lest these arguments and see if there is any verifiable reason beyond a bet on what is possible.

Let us fast forward 10 years to 2027.

As most compare Tesla to Apple, let us give Tesla the highest market capitalization Apple achieved, $800 billion (for round number). Why only $800 billion, why is it not much higher? It is inconceivable to see a business achieving any larger scale without breaking up (and definitely not in just 10 years).  Apple’s market cap was $112 billion in 2007, Tesla’s current market cap is $49 billion (that is we are assuming Apple grew 7X but Tesla would grow 16X).

Let us give Tesla at this size a P/E ratio same as Apple, 16. Compare this to P/E ratios of luxury carmakers, BMW  7.6 and Mercedes 6.5. So we are giving a multiple that is more like a tech company than a manufacturing company.

At 16 P/E, the total profit is $50 billion.

Now to the point on Tesla is more than a Car company. We do not know how the battery business and solar business will play out. So let us assume the split profit  is 60% cars, 40% battery plus solar.

That is net income from car business at 60% ratio is $30 billion. Compare this to reported total EBIT (Earnings Before Interests and Taxes) of entire car industry of $130 billion. We are talking Tesla taking 25%-35% of industry profit. And this profit is just a tad above Toyota.

Now for profit per car. The best reported numbers come from luxury car markers. Porsche is at the top with $17,000. In non-luxury segment trucks make most per vehicle profit of $10,000 to $15,000. Let us say Tesla achieves numbers like these to get $13,000 per car.  Not that the best in class operationally efficient Toyota gets $2800 per car. So Tesla is assumed to have perfected operational efficiencies at scale (something it struggles with now) and have a product mix that is all super high profit vehicles.

At $15,000 profit per car and $30 billion total profit, we are talking 2 million cars per year.

That is less than what any of the top 5 carmakers sell today.

So at its peak, with valuations and profit like Apple, Tesla will sell fewer cars than current carmakers and a total profit that is higher than any operational giant. Why should its car business get any different valuation than the best in class now?

In other words, even assuming the best case scenario for everything – all lights staying green for Tesla, with no pit stops, no detours, no roadside hazards, no traffic on the road – its valuation seem to be based more on the hope and promise of unknown than on known economics.