Tesla’s Valuation Doesn’t Add Up Today, Never Mind $4.4 Trillion Tomorrow
Third-quarter results were only bad relative to the sky-high expectations Tesla sets, but valuation remains the elephant in the room
Tesla TSLA 0.84%▲ had a good third quarter, but this is a stock for which nothing other than spectacular is good enough. Case in point: Chief Executive Elon Musk’s new stretch valuation target is “Apple and Saudi Aramco combined”—about $4.4 trillion.
After the bell Wednesday, the electric-vehicle pioneer reported $3.7 billion of operating profit on $21.5 billion of revenue. While both were new records, both also came in shy of consensus estimates that had already been cut following a disappointing quarterly sales report earlier in the month. Shares fell in after-hours trading.
Tesla set itself up for the fall. It struggled in the second quarter due to Covid-related shutdowns in Shanghai but insisted that it might still be able to hit a target of increasing sales by 50% this year. That raised expectations for the second half. After a merely solid third quarter, all the pressure is now on the fourth quarter, which Mr. Musk said on a call with analysts could be “epic.”
Much of the investor debate around Tesla today is focused on whether demand for its expensive EVs is sagging as a recession looms. The company blamed logistics problems for weak third-quarter deliveries, with more vehicles in transit than usual, but some worry that Tesla’s customer waiting lists are shrinking amid weaker consumer confidence.
While this question influences current sentiment, longer-term investors might find other concerns. The company has proven that it can make desirable cars. That can’t explain why it should be worth 14 times as much as General Motors or Ford, let alone $4.4 trillion. Yet Mr. Musk on Wednesday said he, for the first time, saw “a potential path” to this kind of valuation for Tesla.
Benchmarking Tesla as a cyclical vehicle manufacturer, the aspirational upper limit for its valuation today might be the $184 billion fetched by Toyota, which led the industry through its last great transformation with principles such as lean production and continuous improvement, and still makes the most cars. Assuming Tesla will achieve a higher share of the car market than the current leader seems crazy as new competitors rush into the industry from all sides.
Making EVs also isn’t likely to be any more profitable than making Toyotas in the long run. Mr. Musk makes much of Tesla’s “industry-leading” operating margins—17.2% in the third quarter—but there is almost certainly a trade-off with its aspirations to build scale. Such numbers are achievable while it remains a relatively niche luxury player, particularly at a time of vehicle scarcity, but Tesla wants to go mainstream.
The only explanation for Tesla’s valuation, therefore, is that it isn’t about car manufacturing, but this only raises further awkward questions. The company’s stationary-storage business had a very strong third quarter, but it remains tiny. Everything still appears to hinge on its artificial-intelligence projects, even though the company’s second AI day last month didn’t suggest Tesla has markedly differentiated technology. Mr. Musk reiterated his usual confidence on Wednesday that Teslas would soon be driverless—claims investors have heard many times before.
None of this may matter in the short term as investors worry about demand and Mr. Musk’s expensive purchase of Twitter: Following the third-quarter report he will be free to sell Tesla stock again. Anyone contemplating the company as a buy-and-hold investment, though, still has no good answer to the most fundamental question: How does its valuation stack up?