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.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Gratitude Game, The ABCs of Money and Put Your Money Where Your Heart Is. She blogs on Huffington Post and Medium, and is a frequent guest contributor to national news shows and magazines. 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.