Why Is Tesla Worth So Much? Bubble or Real Values?

The stock rally that Tesla shares have been undergoing for the past months has left many investors puzzled. How is it possible that a company that last year manufactured only 80,000 vehicles is wort more than Ford, GM and now even BMW?

On June 8th, 2017, the most important KPI’s looked like this:

Manufacturer Vehicles Sold 2016 Revenue [billion $] Profit/Loss [million $] market cap [billion $]
Toyota 10,200,000 158.0 14,600 151.34
Daimler 2,198,000 89.3 8,800 77.97
Volkswagen 10,300,000 229.5 5,400 75.69
Tesla 80,000 7.0 -773 61.95
BMW 2,000,000 94.2 6,900 61.11
GM 10,000,000 166.3 9,430 51.34
Ford 6.651.000 151,8 4.600 44,00

Tesladoesn’t only produce less than a twentieth of the cars that BMW does and even less than other car companies, the California-based car company also is the only one in the list recording losses.

The conclusion of many critics and other manufacturers is that nobody wants Teslas and the cars are not making any profit. In fact, Tesla is making money with the cars. The profitmarging was at 24.77 percent, those of Daimler lower at 20.92 and BMW‘s at 20.52.

But why is Tesla writing losses? Simple: instead of hoarding the money or pay it as dividend to the shareholders, Tesla reinvests all the money. And not just the profit. Tesla keeps raising new capital to invest it right away. The money is spent on a number of things: additional charging stations for the Supercharger-network – alone this year Tesla aims at doubling the number of stations, and next year as well. Then money goes into completing and expanding Gigafactory 1 for battery production. Tesla is also scouting land for three more Gigafactories around the globe that also cost money. And then Tesla put money into the development of the Model 3 and the production facilities, and is in the middle of developing the Model Y as well as an electric semi-truck, which also require factories. Also developing solar roofs and the Powerwall require huge investments.

Not to forget the work required on soft- and hardware for self-driving capabilities, better known as Autopilot. Furthermore, Tesla has been equipping all cars manufactured since October 19, 2016 with a several thousand dollar sensor-kit, the Autopilot Hardware Kit 2, which will be fully functional only by next year. Putting that differently: Tesla equips cars with technology that is not yet functional for customers.

It’s not surprising that Tesla is losing money. But each of those investments positions the figures on the chessboard to dominate the electric vehicle market. This strategy is not obvious for other manufacturers, as they see Tesla mainly as an electric car company. But Tesla is narrating a grander vision, and that’s what Tesla is creating an ecosystem. Shareholders and investors have understood that and value is expressed in the share price, reflecting future revenue. That’s called the innovation premium. But let’s start slowly. What’s what exactly?

Story

Good entrepreneurs are able to express a clear vision and inspire customers, investors, and employees. For that you need a good narrative, a good story.

Waymo, the Google/Alphabet subsidiary developing self-driving cars, posted a video of the legally blind Steve Mahan, who’s taking a ride by himself in a Waymo-car and drives to work.

Companies with such narratives enchant investors and are called ‘story stocks‘ – stocks with a narrative – that look into the future and highlight possibilities that sound too good to be true. Those companies are very difficult or almost impossible to evaluate with traditional metrics.

Elon Musk called those share values “risk-adjusted future cashflows.” Tesla is telling such a future utopia about safe, reliable, powerful, self-driving electric vehicles, powered by solar energy and thus saving the environment.

German and American manufacturers as well had a narrative – in the past. What stories are they telling today? “Das Auto.” “Advancement through technology.” “Joy of driving.” Those are not narratives. What those companies offer instead is the Dieselskandal, disappointing electric vehicles, or rather the announcement of new electric vehicles, and generally the impression that cars are built only for men in a certain age.

Tesla builds an ecosystem

While BMW, Daimler, or GM mainly build cars and halfheartedly position themselves as mobility service provider, but still build cars, Tesla builds an ecosystem.

We can compare this with two companies from another industry. Apple and Samsung. Samsung manufacturers electronic devices: smartphones, TV-sets, washinlaundry machines. And Samsung is very good in doing this, but what Samsung doesn’t really know is who the customers are, and how they use those devices. Apple,on the other hand, builds an ecosystem. With iTunes Apple knows what devices each user has, what music they listen to, what movies they watch and apps they have, and when they listened, watched, and used them.

Traditional manufacturers build cars, but as soon as they ship it to the dealers they don’t know much anymore about the customers and how they use the cars. The cars are also not being updated, they are ageing as soon as they leave the dealers’ lots. Manufacturers are not caring about charging station. Why should they? They haven’t taken care of gas station either in the past.

Tesla offers charging stations, solar roofs, and update services. The car is getting better over time and keeps receiving more functionality. Tesla stays in touch with owners and even makes offers for new cars with a notification of a possible buyer for the owner’s old car.

As a Tesla-owner one never leaves the Tesla-universe. Tesla controls the complete experience of the owner. Even the Tesla-dealer is not a third party dealer, but a Tesla-employee. An owner is taken care from beginning to the end.

Innovation premium

Companies that investors trust in having a large potential for innovation receive a down-payment in trust in their evaluation. This innovation premium is calculated from the projections of company revenue, the growth of the current business model, and the present value of that cashflow, which is then compared to the current market capitalization. If the market capitalization is higher, then the difference can be explained with the educated hunch of the investors. They consider this company as innovative. it’s not just the expectation of an organic future growth through existing products and services, but from new and innovative ones.

For mid-2015 this approach brought the following ranking, which lists  Tesla Motors with an innovation premium of 84.82 percent. The innovation premium for the following car manufactures is listed in the table (sourced from *Forbes Innovation Premium Ranking and **The Innovator’s DNA):

Manufacturer Innovation premium
Tesla* +84.82%
BMW** -26%
Toyota** -26%
Honda** -27%

How are those numbers for each manufacturer to be interpreted? Does it mean that BMW, Toyota, or Honda are not innovative? Not necessarily. Those companies even have large R&D-budgets allocated (VW before the Diesel-scandal had the largest R&D-Budgets of all publicly listed companies), and those budgets can lead to innovation, but this is not necessarily correlated. But the share holders believe make an educated bet that those companies will have difficulties in generating significant income from their innovations. Not only are they competing against their existing foes, but also against new entrants such as Tesla. Shareholders expect from Tesla that their innovation activities will generate above average revenues and profits. And that trust and educated hunch is reflected in the share prices as innovation premium.

Conclusion

The shareholders’  trust in the narrative of companies that create an ecosystem for a larger vision is more compelling than the visions that traditional manufacturers demonstrate. Together the innovation premium of those story stocks with an ecosystem stun those investors that see the company value mainly centered around equipment and buildings – i.e. hard assets. If one starts to look at the difference between past- and present-thinking with future-thinking, we quickly realize how little today’s business metrics and evaluations are reflecting a company’s value. A vision, as well as employees with the will to turn the vision into reality are core elements of the company evaluations that we see today. GM, Ford, and now also BMW don’t get the same level of trust by shareholders that they are capable in exploiting their potential in the future in a similar manner as Tesla.

This article has also been published in German.

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