The stock that The Big Short investor Michael Burry—among other prominent skeptics—is betting against as wildly overvalued is bubbling again. At 2:00 p.m. on Sept. 7, Tesla defied a modest downdraft in the S&P 500 by adding 20 points, or 2.7%, to $754 a share, lifting its market cap to $755 billion. The EV maker staged a powerful, $200-billion-plus resurgence from the depths of mid-May, when its valuation had dropped one-third from its January peak. Tesla’s much-better-than-expected earnings in Q2 cheered investors and inspired longtime fan Cathie Wood of ARK Invest to predict that its shares will quintuple to $3,000 by 2025. CEO Elon Musk further stoked optimism by declaring in a recent email to employees that Tesla could be selling or leasing five to 10 million vehicles annually in four years, a seven- to 14-fold increase over its deliveries in the past four quarters.
It’s sobering, however, to compare Tesla’s gigantic market cap and slender earnings to the “all other” category of manufacturers that bend metal into hoods, frames, and chassis. The second- to seventh-most-valuable automakers are Toyota ($252 billion), Volkswagen ($149 billion), BYD ($112 billion), Daimler ($89 billion), Great Wall Motors ($73 billion), and General Motors ($71 billion). By the way, BYD—backed by Warren Buffett’s Berkshire Hathaway—is a major Tesla rival as China’s largest EV producer. All told, those six carmakers feature a combined valuation of $746 billion.
So Tesla’s market cap of $754 billion exceeds the total for the next half-dozen global players by $8 billion. In all, 44 automakers worldwide display significant market caps. The group ranked from seventh to 44th encompasses Stellantis (No. 9), BMW (No. 10), Volvo (No. 11), Honda (No. 13), and Ford (No. 14). Those 37 harbor a total market cap of $873 billion. So Tesla is worth almost 90% of that bunch as well. Tesla’s value now equals 46% of the combined total for the world’s other 43 automakers.
How about profits? Over the past four quarters, the carmakers ranking second to seventh in market cap posted total net earnings from continuing operations of $83 billion. If you built a portfolio of that half-dozen weighted by their valuation, you’d be paying a price/earnings multiple of just 9 (the cap of $746 billion divided by $83 billion in profits). If the automakers paid half their income in dividends, those payouts would hand shareholders 4.5% a year. If the companies reinvested the balance in new plants and technologies at a modest return of just 7%, they’d be growing earnings at 3.5%. Hence, by owning them, you’d be consistently pocketing gains of 8% a year. And that’s if their overall P/E remained flat at its current, ultra-modest level of 9. Sounds like an interesting value play.
Of course, Tesla has long been a different beast, the ultimate aspirational growth story, and its shares’ recent comeback greatly raises the bar for what it must achieve to reward investors. Over the trailing four quarters, Tesla notched net earnings of $2.18 billion. That figure is deceptive because $1.4 of those profits flowed from the sale of regulatory credits to other automakers, a fount that management acknowledges will fade quickly from here. In Q2, Tesla’s performance improved dramatically. Excluding the credits, it earned a record $820 billion. So it might be fairer to tag Tesla’s P/E not to its trailing four quarters of earnings, but by annualizing its all-time best showing in Q2. At our “normalized” net profits of $3.28 billion (four quarters at $820 million), Tesla’s multiple is 230, 26 times the combined number for its six most valuable rivals.
From these heights, how fast would Tesla need to grow its earnings to generate the 8% annual return that looks like a gimme for the Toyotas, Volkswagens, and GMs, chiefly because they’re so much cheaper. Let’s look out nine years to September 2030 and assume that Tesla will by then still command a premium multiple of 30. Since it’s unlikely to pay a dividend, all of the gains must come from the rise in its stock price. If Tesla’s shares waxed by our required 8% a year, its market cap would double to $1.5 trillion by mid-2030. At a P/E of 30, in our scenario, it would be gushing $50 billion in net earnings (the $1.5 trillion valuation divided by the multiple of 30).
Getting from today’s $3.28 billion in net earnings (pre–credit sales) to $50 billion in nine years would require stupendous annual increases of 58%. And 8% a year is hardly sumptuous compensation for holding the riskiest mega-cap stock on the planet. The old-line carmakers poised to challenge Tesla with their own EVs are hardly a galvanizing group, but they look like decent buys. They’re earning so much right now for every dollar you’re paying that you’ll do fine if they just bump along. Tesla can only furnish even decent gains by achieving feats seldom witnessed in the annals of capitalism. Tesla champions’ leap of faith may be a leap too far.
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