Tesla’s Trillion Dollar Valuation – A Financial & Operational Analysis
Tesla’s market capitalization passed the trillion-dollar mark on October 25, 2021, joining 5 other companies in this elite club. Yet, the company sold “only” 628k vehicles in the first nine months of 2021 vs. 6.5M for the Volkswagen Group or 6.3M for Toyota, companies that have respective market caps of about $140B and $250B. Tesla does not operate the same way incumbents do and should not be considered as a traditional OEM for valuation purpose.
Tesla has been growing at a 50% CAGR over the past 5 years and intends to maintain this growth rate in the coming years. The anticipation of future profits plays a key role in Tesla’s market cap but the latter is largely driven by the company’s operating and business models (e.g. direct-to-consumer) and its intrinsic operational efficiency. Let’s break this down from the top line to the bottom line.
Higher Revenue per Vehicle Sold
A major differentiator between Tesla and incumbents is the former’s direct-to-consumer (DTC) model. It brings in-house profits typically generated by dealers and provides Tesla with full control over retail prices, i.e. its own top line. It is important to note that the company has a fixed-price policy (retail price is not negotiable) and often adjusts pricing. The company does so in order maximize total profitability, aligning demand with manufacturing capacity, while also reflecting the competitive landscape.
For instance, prices for entry versions of Models 3, Y and S increased mid-October by respectively $2k, $2k and $5k in the USA. This brought the cumulative price increase for Model 3 entry version (a.k.a. Standard Range Plus, now Rear Wheel Drive) to $8,000 from the low of $36,990 last March to the current high of $44,990 (+ shipping & taxes) with a small increase in content and range. This 22% price hike over 7 months must be put in perspective with the significant imbalance between demand and supply: delivery times increased for 2-3 weeks in March to seven months today (though more expensive versions are available within a month).
As inventories have been running very low across the industry recently, dealer margins have ballooned since buyers tend to pay full sticker price (or above) to secure their purchases. Tesla’s DTC model makes it possible to benefit from this situation — even if the company has been able to largely circumvent the chip shortage thanks to their operational agility.
What is the extent of Tesla’s financial advantage with its DTC model? New car dealers in the USA typically generate a gross margin of 8-10% for full-line brands and 10-15% for premium ones. For reference, AutoNation, the US largest auto distributor with 205k new vehicles sold during Jan-Sept 2021, generated a gross margin of 19% and a net income of $4,800 per new vehicle (18% and $1,300 last year). By comparison, Tesla has a 16 percentage-point advantage in gross margin vs. GM and a ~$3,000 advantage in net income per vehicle vs. GM or VW – including Tesla’s “regulatory credits” (see graph below).
Overall, Tesla’s average revenue per vehicle (incl. financing activity) stood at $48k over 9 months 2021 when the cheaper Models 3 and Y accounted for 93% of the volume. It comes close to Daimler’s average at ~$55k when the expensive heavy commercial vehicles are excluded. Tesla’s figure is well ahead of both VW’s and Toyota’s. GM’s average is diluted by the sale of low-cost vehicles in China (see graph above). All numbers include financing activities.
Overall Operational Efficiency
Tesla demonstrates higher efficiency on several fronts including engineering, manufacturing, and retail.
EVs require less labor than ICE vehicles to assemble as their powertrains are made of far fewer parts. For reference, VW Group’s CEO was recently comparing their massive Wolfsburg plant with Tesla’s future Berlin plant. The former builds around 700k units per year with 24k employees vs. a projected 500k units with 12k people for the latter. Incumbent OEMs will progressively benefit from lower labor cost per vehicle as they shift to EVs. However, Tesla will maintain an early mover advantage on industrial processes related to electric drives, cells, and battery packs.
Tesla’s well-oiled over-the-air (OTA) updates allow the company to largely reduce the cost of recall campaigns. Software updates can be pushed to all functions of the vehicle whereas incumbents have only recently started deploying OTA updates on limited scopes. This capability also allows Tesla to generate incremental, high-margin revenue with a pay-per-feature business model.
Tesla’s statement of cash flows shows depreciation & amortization per vehicle at $3,300, close to Daimler’s and VW’s levels. Both GM and Toyota (value based on FY2021) stand at about $2,000, likely relying on more fully depreciated assets than the other players. I believe all incumbents will see depreciation & amortization increase significantly as they invest massively in electrification.
Tesla does not advertise which avoids an otherwise very significant line item that directly impacts the operating margin (see below). The company relies on word of mouth — owners are brand promoters — and its highly visible CEO. For reference, GM spent $2.7B in advertising in 2020 down from $3.7B in 2019, which amounts to $400-450 per vehicle or 2.5% worth of operating margin.
All in all, Tesla achieves an operating margin above 9% (without “regulatory credits”, 12% when they are accounted for), slightly ahead of the pack which achieves between 7.5% and 8.8%.
Net Income, Cash Flows and Market Cap
Tesla’s overall performance results in the second highest net income per vehicle of the group behind Daimler (see below). However, it should be noted that it includes $1,800 worth of “regulatory credits” (CO2 credits sold to other OEMs). This is not sustainable even if Tesla recently signed new deals with Honda and JLR which will replace Stellantis in the pool. Nevertheless, these credits brought over $1B in Tesla’s coffers so far this year. As it is, the Californian company’s net income of $5k per vehicle is well above those reached by Toyota, GM and VW.
Cash flow from operating activities is another metric where Tesla already performs well. It reached $3.1B over 9 months 2021 or $5.0k per unit sold, i.e. close to VW’s $5.2k. This compares with $10.6k per unit for Daimler and $2,100 for GM (Cruise consumed $150 of cash per unit sold).
Tesla’s market cap reached $200B in June 2020. Beyond the above strengths, the massive rise to its current level above $1T also results in part from a brisk acceleration of the EV market, essentially in Europe and China compounded with increasingly favorable public policies in these regions and the USA. Another contributor is the now-clear willingness of key incumbents to fully embark on the EV bandwagon, such as Volkswagen, Renault, Daimler, GM, Ford of Hyundai.
The crave of financial markets for “everything EV”, including several emerging EV players going public, has also fueled Tesla’s increasing valuation. They include Lucid and Rivian (just IPO’d at $80B before delivering its first vehicle) in the USA, Xpeng and Li Auto in China and Arrival in Europe. Hertz’ announcement of a 100k-vehicle order set the recent fire to the stock as the resulting exposure to the Tesla’s products will have a multiplier effect.
Lastly, Tesla is more than a car manufacturer. It has the unique expertise to develop in-house the full suite of software needed to deliver on its promise and that includes autonomous driving. No incumbents, at least today, have this level of capability. The company operates its own charging network with 30k charge points across the globe which it is now making available to non-Tesla vehicles. It is highly vertically integrated across the electrification supply chain, recently adding an investment in mining.
I will not argue whether Tesla is worth over $1T – as it is the market that decides – but I am certainly glad it has reached this level. A happy Tesla owner, I live 5 km away from the company’s HQ and have been a well-rewarded investor for several years.
Note: This analysis is based on companies’ public reports and relates only to their industrial activities (passenger vehicles, vans, heavy trucks) and financial activities. Tesla’s solar and stationary power storage businesses (3-5% of total sales) are included as they cannot be carved out. Tesla-specific “regulatory credits” are excluded from revenue per unit but included otherwise. Toyota’s data related to gross margin is not available.
Managing Director, Orsay Consulting
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