Tesla Says Model 3 on Track as Quarterly Loss Beats Estimates

He's taking huge risks because other people are footing the bill.

Long term, Tesla looks like it will be a reasonable company. But will it justify its stock price?

Tesla is a $45B company right now. Toyota is $188B (4.1x more valuable), VW is $78B (1.7x), GM is $58B (1.3x), Ford is $51B (1.1x), Nissan is $42B (0.9x), Fiat Chrysler is $17B (0.4x), Honda is $58B (1.3x), BMW is $56B (1.2x), Daimler is $79B (1.8x), and Mazda is $9B (0.2x). Tesla, right now, is still risky. Toyota's profits are real. GM's profits are real. BMW's profits are real. Tesla's profits might be great in the future - and that risk means the potential profits are worth less than actual profits. So, given that there's a good amount of risk and it's going to be a while before those profits come rolling in, it seems like Tesla would have to be the next Toyota to justify a $45B price tag. Let's say that in 20 years it becomes the next VW or Daimler. Would that justify a $45B price tag today? Probably not. It wouldn't be a high return and the likelihood that Tesla is going to become the next VW or Daimler is low. That's not a dig at Tesla so much as realism. No matter how great you are, it's hard to become one of the top 3 companies in an industry.

You note Tesla's non-GAAP margins of 22.2%. "During the past 13 years, the highest Gross Margin of Honda Motor Co Ltd was 29.06%. The lowest was 22.39%. And the median was 25.58%." 22.2% isn't bad, but selling more vehicles will put downward pressure on that. Gross margin doesn't include things like R&D so spreading that over more sales won't impact gross margins. Can they drive down COGS? Maybe, but serving a less enthusiastic audience also bings costs and challenges. It's easy for Tesla to lean on the enthusiasm and good will of early-adopters right now.

But Tesla also faces existential threats. Musk has said that they should have full self-driving capabilities by the end of 2017. For some people, owning a car will still make sense, but for many getting on-demand transportation means not having to deal with car ownership. Car sharing rates are going to drop to the floor. A self-driving cab can easily handle the load of multiple people that might own cars today. Even if the self-driving cab has a margin of 40%, if you're only paying for 1/5th of the vehicle, well, 140% * 20% = 28%. Given that cars are a major expense for many people, being able to cut 70% off that expense will be attractive to many - and will mean that the demand for cars will become smaller.

Similarly, Tesla has opened up all its electric patents to competitors. Musk has said that making electric cars is easier than making internal combustion ones. So, if Musk shows that electric cars can be profitable, won't everyone else add a huge amount of competition? I mean, Tesla is really cool for opening up its patents to competitors, but that indicates to me that Tesla is more about pushing the human race forward than it is about making money.

Tesla is certainly a cool company. I love that they're pushing us forward - and in cool ways. I love that Teslas don't look ridiculous like a BMW i3. I love that the solar roof they announced is something my parents would be cool with because it looks normal. But I'm also kinda glad that they're doing this with money that isn't mine. Musk is on a mission and it's a cool one. Self-driving electric vehicles with solar power and all sorts of coolness. I think there's a decent chance Tesla will become profitable. But the bet at its current market valuation is that it will become the next Toyota. Nothing short of that would justify the valuation. Eventually, automobiles just don't have the economics or growth of software and the PE ratios are generally in the 6-10 range. I mean, if Tesla becomes as big as Toyota, it won't likely be able to become 10x as big as Toyota. I mean, Toyota sells around 10M automobiles annually. The top 15 auto makers sell around 73M. So, if Tesla becomes Toyota, there's not a lot of growth past that. And based on its current price, if it only becomes GM or Ford or BMW in the next decade, it will have seen basically no growth in its value.

What's the likelihood that Tesla is the next BMW? It's low. Not because Tesla isn't cool. Not because I don't want them to succeed. It's because it's hard to go from 100k niche cars per year to 2.3M. Even if you think the chance if 50% 10 years from now, that means you're saying there's a 50% chance that Tesla should be worth 20% more than it's worth now in 10 years time.

The world would be better if Tesla became the next BMW. We'd have a lot of lower-polluting vehicles on the road and other manufactures would follow Tesla. But I think it's very far from a sure thing and a lot of investors are pricing Tesla like it's a sure thing that Tesla will be the next Toyota. Tesla is so cool and they're pushing us toward a better world. They're making great strides. At the same time, looking at their current valuation, it's hard to see the upside. Maybe the vertical integration will be wonderful. Maybe people won't want self-driving cabs (though that seems unlikely). Maybe other manufacturers won't compete effectively with electrics. But that's a lot of "maybes" in the path of becoming one of the most valuable car companies out there. I hope they do it because I'll have a better world, but I wouldn't bet my money on it.