On February 4, 2020, Tesla hit an all-time high of $969/share, for a total value of $175 billion. Today, the stock has pulled back to $748.96/share, with a market capitalization of $132.43 billion. That is $49 billion more than the combined value of General Motors and Ford Motor Company, with market caps of $48.18 billion and $35.60 billion, respectively. If you invested low in Tesla, and are now a gazillionaire, congratulations. If you are tempted to buy in now, then splash some water on your face, and let’s take a closer look at Tesla’s price and potential.
The real question is, “Is Tesla worth GM and Ford combined?” The answer today is, “Yup, if you listen to investors.” However, if you look at the data, the valuation seems quite a bit frothy, even with the share price pullback over the last few days. Tesla’s sales of $24.58 billion in 2019 are still a fraction of GM’s $147 billion & Ford’s $160.34 billion. Investors are betting on Tesla’s sales growth, particularly in China. However, Tesla’s 2019 year over year revenue was up only 2%. 4Q 2019 net income was $105 million, with a full year loss of -$775 million. Yes, sales in China will start ramping up and showing on the earnings going forward. However, that is at least partially offset by the expiration of the federal EV tax credit, which makes Tesla cars much more expensive in the U.S.
There’s no question that Tesla has become the greatest market disruption success story of the early 21st century. VOIP never displaced AT&T. Rather than offering a secure, private and democratic way to bypass banks, cryptocurrency has been rife with crooks and scams. However, Tesla set out to make gas guzzlers a thing of the past, and is making good on its promise.
Tesla started with a sexy Roadster in 2008 that could beat a Porsche from zero to 60. The Tesla Roadster was a far cry from the golf cart electric vehicles available at that time. In 2013, the Tesla Model S scored the highest safety rating by the NHTSA. The Tesla 3 launched in 2017, and quickly became the #1 bestselling car by revenue in July and August of 2018. The Tesla 3 is still the #7 bestselling car in the U.S. Both Ford and GM were pushed out of the sedan business by Tesla in 2019. General Motors’ CEO Mary Barra believes that self-driving electric cars are the product of tomorrow, and is investing heavily in “a future of zero emissions and zero accidents.” Jim Hackett, Ford’s CEO, is leaning into EVs as well, with plans to launch 16 EVs by 2022.
The purchase price of a Tesla 3 is higher than the 6 cars ahead of it (all made by foreign manufacturers). However, the dramatically lower costs of fuel and maintenance make the cost of ownership lower than the bargain brand competition. This story has not been well-marketed, however. The average car buyer is not be in the loop on this yet, and is still making purchases based on price, not quality and fuel/maintenance savings.
Tesla’s solar roof tiles look amazing. However, revenue from Tesla’s energy storage and generation vertical was lower in 2019, despite a 30% federal tax credit being in play. I spoke to a developer recently who declared that the price of the solar roof tiles is absolutely eye-watering. Price and financing options are likely to have hands in the slow rate of adoption. Once price becomes as appealing as the product, solar roof tiles could take the world by storm. We’re not there yet.
Investing in a cash negative car company that is currently valued at 1.3 billion times more than earnings seems foolish in any marketplace and downright delirious in the late stage of the current business cycle. Elon Musk has been tireless, crafty and magical in achieving milestones that seemed impossible. Tesla cars are stunning feats of ingenuity, performance and beauty. However, betting that Tesla will continue to be the only electric luxury sedan in town (around the world) is a dangerous game. And valuing the company at 1.5 times the value of the other two major American automakers is a little too early to declare a complete knockout by Tesla of the competition. Anyone who has been in the Northeast and has witnessed how fearful drivers are of driving an EV in the snow understands that this market has a way to go to completely displace gasoline-powered vehicles.
Both Ford and GM are currently constrained by a last century business model and execution plan. Ford and GM sales come mostly from gas guzzling pickup trucks and SUVs. Additionally, Ford and GM are still heavily weighted down by legacy promises of pensions and other post-employment benefits (OPEBs), such as health care. GM exited bankruptcy in 2009. However, the company’s debt/equity ratio is still 1.56. GM is currently underfunded on its pensions and OPEBs by $17.2 billion (#5 on the most severely underfunded list). Ford’s D/E is 2.82, with $11.86 billion underfunded on pensions and OPEBs (source: S&P Dow Jones Indices).
By comparison, Tesla has no pension obligations. Tesla has a lot of debt, too, and is carrying a D/E of 1.76. However. Tesla’s debt is being used to build more factories to keep up with demand. GM and Ford are borrowing to pay for legacy promises that they are having difficulty keeping.
Ford’s plans for innovation and relevance in the autonomous electric vehicle marketplace is further complicated by potential capital constraints. The company was downgraded to junk by Moody’s in 2019. Ford is paying a yield of 6.7% to stockholders to keep them interested. The strategy of high dividends accompanied by massive borrowing and declining sales didn’t work out very well for GE. When GE cut its dividend, the stock fell by half instantaneously. GE shares are valued at about a third of what they were in January of 2017. GM and Chrysler both had to restructure their debt in the Great Recession. Ford skirted restructuring in 2008. However, Ford suffers from the same legacy costs that took down the other century-old auto manufacturers.
Ford’s unit sales were down 10% in 2019 (from 2018), with revenue off 3%, to $156 billion. Net income imploded. Ford’s 2019 net income was just $84 million, down from $3.7 billion in 2018 and $7.8 billion in 2017. With over $154 billion in long-term debt, and $220.5 billion in total liabilities, restructuring could be forced on Ford Motor Company, which is one of the reasons why the company is now rated “speculative.”
All three of these U.S. car companies have sales and supply chains in China. So, the coronavirus is another variable that casts shade on Tesla’s sunny stock summit. With any luck, the coronavirus scare will pass soon, without too much economic impact or more deaths. However, that is another variable that makes the current frothy valuation quite speculative.
I love Tesla cars, and believe strongly in this company. However, this valuation is too rich for my blood. If I were in the money, I’d be selling.
Other Blogs of Interest
Artificial Intelligence is on Fire. Is it Time to Buy S'More?
Take the Retirement Challenge.
2020 Investor IQ Test.
Answers to the 2020 Investor IQ Test.
Win a Seat at a Retreat
The Cannabis Capital Crunch and Stock Meltdown.
Does Your Commute Pollute More Than Planes?
Are Health Care Costs Killing Your Budget?
2020 Crystal Ball.
The Benefits of Living Green. Featuring H.R.H. The Prince of Wales' Twin Eco Communities.
What Love, Time and Charity Have to do with our Commonwealth. Interview with MacArthur Genius Award Winner Kevin Murphy.
Unicorns Yesterday. Fairy Tales Today. IPO Losses Top $100 Billion.
Counting Blessings on Thanksgiving.
Real Estate Prices Decline.
Hong Kong Slides into a Recession. China Slows.
They Trusted Him. Now He Doesn't Return Phone Calls.
Beyond Meat's Shares Dive 67% in 2 Months.
Will There be a Santa Rally? It's Up to Apple. Will JP Morgan Implode on Fairy Tales and Unicorns.
Harness Your Emotions for Successful Investing.
What the Ford Downgrade Means for Main Street.
The Dow Dropped Over 1000 Points
Tesla's 3Q 2019 Deliveries Could Hit 100,000.
Do We Talk Ourselves into Recessions? Interview with Nobel Prize Winning Economist Robert J. Shiller.
The Winners and Loser of a Clean Energy Policy.
Make the Climate Strike Personal.
Ford is Downgraded to Junk.
From Buried Alive in Bill to Buying Your Own Island.
The Manufacturing Recession. An Interview with Liz Ann Sonders.
Gold Mining ETFs Have Doubled.
The Gold Bull Market Has Begun.
The We Work IPO.
The Highs and Hangovers of Investing in Cannabis.
Recession Proof Your Life.
China Takes a Bite Out of Apple Sales.
Will the Dow Hit 30,000? A Check Up on the Economy
Red Flags in the Boeing 2Q 2019 Earnings Report
The Weakening Economy.
Think Capture Gains, Not Stop Losses.
Buy and Hold Works. Right?
Wall Street Secrets Your Broker Isn't Telling You.
Unaffordability: The Unspoken Housing Crisis in America.
Are You Being Pressured to Buy a Home or Stocks?
What's Your Exit Strategy?
Will the Feds Lower Interest Rates on June 19, 2019?
Should You Buy Tesla at a 2 1/2 Year Low?
It's Time To Do Your Annual Rebalancing.
Cannabis Crashes. Should You Get High Again?
Are You Suffering From Buy High, Sell Low Mentality?
Financial Engineering is Not Real Growth
The Zoom IPO.
10 Rally Killers. Fix the Roof While the Sun is Shining.
Uber vs. Lyft. Which IPO Will Drive Returns?
Boeing Cuts 737 Production by 20%.
Tesla Delivery Data Disappoints. Stock Tanks.
Why Did Wells Fargo's CEO Get the Boot?
Earth Gratitude This Earth Day.
Real Estate is Back to an All-Time High.
Is the Spring Rally Over?
The Lyft IPO Hits Wall Street. Should you take a ride?
Cannabis Doubles. Did you miss the party?
12 Investing Mistakes
Drowning in Debt? Get Solutions.
What's Hot in 2019?
The Debt Ceiling Was Hit (Again) on March 1, 2019.
How Bad Will the GDP Report Be?
2019 Investor IQ Test
The State of the Union
CBD Oil for Sale.
The High Cost of Free Advice.
Apple's Real Problem in China: Huawei.
2019 Crystal Ball.
2018 is the Worst December Ever.
Will the Feds Raise Interest Rates? Should They? Learn what you're not being told in the MSM.
Why FANG, Banks and Your Value Funds Are in Trouble.
When the Santa Rally is a Loser, the Next Year is a Bigger Loser.
Russia Dumps Treasuries and Buys Gold
OPEC and Russia Cut Oil Production.
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable however NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.