Why Is TSLA Still Surging?
Tesla shares are up 20% today following a 45% move over the previous month. The most recent share price surge is attributed to a combination of two factors: short-covering and greater investor optimism that Tesla is a tech company that has a plan for the future of transportation. We continue to expect shares to be volatile in the years ahead but, ultimately, trend higher given the company’s pole position in undeniable truths related to electrification and autonomy.
Is This Move Justified? Moving Beyond Ford & GM to Apple & Amazon
Tesla is now valued at $140B, compared to Ford at $35B and GM at $48B. The gap in market caps suggests investors are increasingly viewing Tesla as a tech company. We believe there’s merit to that view and the company’s valuation should be viewed in that context.
Apple. We see the logical tech comp as Apple, which similar to Tesla has a combination of hardware, software, and services. Out of respect for Apple’s accomplishments over the past 40 years, we believe it’s premature to award Tesla with an Apple-like revenue multiple today. That said, if Tesla continues to deliver revenue growth of 20% plus annually over the next few years, the comparison will gain creditability. Today, Apple is trading at 4.5x next year’s revenue. If in each of the next three years Tesla grows revenue at 20%, the company will reach $80B in revenue in 2023. Applying a 4.5x multiple on revenue equates a $360B market cap, compared to today’s $140B cap. We believe this is an achievable goal given the size of the addressable EV market along with Tesla’s ability to charge for Full-Self Driving software updates.
The missing piece in our logic is earnings. Apple sets the standard when it comes to earnings power and to conceptualize Tesla reaching similar margins in the next three years is reckless. That said, the market has consistently prioritized and rewarded revenue growth (a.k.a Netflix and Amazon) ahead of earnings, suggesting there’s more upside to TSLA shares.
Amazon. The Tesla valuation exercise is similar to that of Amazon in 2010. At the time, Amazon had sporadic earnings but a large addressable market in front of it. Investors opted to give Amazon the overwhelming benefit of the doubt that, eventually, they would deliver on consistent earnings with a goal of 10% operating margin. That operating margin target has not materialized but the company’s revenue growth has. The market value of Amazon has increased from $59B in 2010 to $938B today (Jan 1, 2010 – present).
So, is Tesla over- or undervalued? The simple answer is: if investors continue to give a handful of companies the benefit of the doubt, Tesla’s market cap will likely move higher than its current $140B over the next five years.
Short Covering Continues
Given the trajectory of today’s move, it is likely that short covering is the primary factor in the move. That said, the controversy regarding the Tesla story is far from over. Recent data on short interest shows that before today’s move there was about 14% TSLA short interest, down slightly in the past month. This is much higher than the typical tech stock with 1-6% short interest. It’s also worth noting that Elon Musk holds about 20% of the company which essentially removes those shares from the float (he will not borrow them to short-sellers). Factoring that, the effective short interest is closer to 17%.
Winning Over Investors With the Potential of a Business Miracle
The thesis for Tesla’s business miracle is rooted in the handful of years that the company operated with effectively no competition. They have invested aggressively and built expertise in areas that will make a new EV buyer more likely to buy a Tesla than an EV from a traditional automaker. Tesla has nearly a decade head start in EVs as other automakers under-invested in the space, allowing Tesla to build deeper knowledge related to battery design, a charging network with greater coverage, a better user experience, and more advanced self-driving capabilities.
Three Foundational Advantages
- A More Efficient Battery. Range is one of the most important factors of an EV buying decision. Range anxiety represents the biggest headwind for mass adoption of EVs in the near-term. Once the entire industry has gone through the massive transition to electric, components like long-range batteries, electric drivetrains, and a ubiquitous charging network will be largely commoditized. That said, in the next ~10 years, differentiation in these areas will be important in gaining market share. Tesla’s accumulation of advantages in these areas lies at the center of its potential business miracle.
- Vertically Integrated Charging Network. There are 15,000 Tesla fast-charging stalls worldwide, which is 10x greater than ChargePoint’s 1,500 fast charging stalls. It is generally accepted that Tesla’s charging network is preferred to generic EV charging stations because of its near ubiquity (99% of the US population lives within 150 miles of one) and ease of use (integrated route planning and payment). This has been a huge area of investment for Tesla and will continue to be a focus for years to come. Although we believe that that EV charging will eventually be commoditized similar to current fuel infrastructure, it represents a huge comparative advantage for Tesla. Nothing eases range anxiety like knowing you can charge your car at several locations nearby, and it’s a compelling selling point when EV buyers are considering their options.
- Software Updates and Deferred Revenue. In September, Tesla released Software Version 10.0. The most notable new feature, Smart Summon, allows Tesla owners who have purchased Full Self-Driving (FSD) or Enhanced Autopilot to request their vehicles to self-navigate a driveway or parking lot and pick them up. The company sells its FSD software upgrade for $7,000 per vehicle. Tesla is the only car company that incrementally recognizes revenue on high-margin software as they roll out new versions and features. This creates a unique system of taking in money to continuously develop and improve the system that consumers have paid for up-front. Another advantage is Tesla’s proprietary hardware, which is capable of powering more advanced features as Tesla inches closer to full autonomy.