- Tesla’s stock has been on an epic tear; the electric carmaker’s market cap has left GM and Ford in the dust.
- Meanwhile, GM and Ford both reported tepid Q4 earnings, although both automakers were solidly profitable for the year. Tesla has never reported an annual profit.
- The assumption is that the stock market is voting for Tesla and against the legacy automakers, but the incumbents and Tesla are actually in different markets. Recent comments by the chief financial officers of Ford and GM bolster that case.
- Lurking in the shadows of the Tesla rally is a hard fact: global electric-vehicle sales are a mere 2% of the total, and it could be staggeringly expensive to improve that figure and justify Tesla’s stock price.
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The contrast is beyond vivid: Tesla has enjoyed a near-vertical stock rally that’s made it the second-most-valuable automaker on the globe, thanks to a market capitalization of almost $170 billion.
Meanwhile, General Motors and Ford both reported fourth-quarter and full-year earnings this week, and they were impressive only to the degree that GM absorbed a 50-day strike last year and still made money on an adjusted basis in the quarter, while Ford managed to slightly beat analysts’ expectations for revenue.
Of course, both legacy automakers still made about $6.5 billion apiece in 2019; Tesla lost $862 million, although it finished in the black for two consecutive quarters in the second half of the year.
There’s been plenty of head-scratching about Tesla’s share-price surge, which has been thoroughly irrational, even if you’re some kind of ultra-bull who thinks that the core business — electric cars — is staged for staggering future growth.
The scratching is pointless. Tesla completely dominates the EV market. The question now is: “How big can that market get?”
We’re gonna need a bigger EV market
For Tesla to be worth a couple of GMs and a Ford or two, the market needs to get much, much, much bigger. At the moment, it’s 2% of global sales. Rationally, Tesla should be able to manage $30 billion in annual revenue and maybe $4 per share in yearly profit, assuming that the company doesn’t lose the opportunity to sell emissions credits, which in several profitable quarters (including Q4 2019) have been the only thing that tipped results positive.
Tesla has aimed itself in that direction, shifting from selling $100,000 EVs to selling … $50,000 EVs, just more of them. On balance, however, Tesla is currently selling pretty much one car, the Model 3. The Models S and X are long in the tooth and making a modest contribution to overall volumes.
Other automakers aren’t currently looking to flood the market with electric vehicles, even though they’re preparing to launch a lot of EV models.
So what should be obvious here is that there’s a Tesla market, which is small and potentially modestly profitable, and a vastly larger traditional market, which is far more reliably profitable.
I spoke to Ford CFO Tim Stone after Ford announced earnings on Tuesday, and although he was disappointed by the results, he understood that they were expected. Ford had to book a bunch of one-time expenses for the quarter, and the company is in the midst of an $11 billion restructuring.
Stone rightly highlighted the company’s plans to refresh three quarters of its vehicles in 2020, including a redesign of the F-150 pickup truck, the carmaker’s cash cow. He called this a “global redesign tailwind” and stressed that Ford’s marquee electric offering, the Mustang Mach-E, had already generated a significant amount of customer enthusiasm.
Ford is also ditching slow-selling passenger cars in the US market to concentrate on profitable models.
Tesla doesn’t compete with Ford in this area; in fact, Tesla isn’t even in these markets. The Cybertruck is attention-getting, but it doesn’t exist as a production model, while the F-150 has been America’s bestselling vehicle for over four decades.
How about fewer cars?
GM is taking a different approach. It’s worth pointing out that if we take GM’s market cap, at about $50 billion, break out its self-driving unit, Cruise — valued at $20 billion — we have a $70 billion overall valuation.
GM is spending $1 billion a year on Cruise and has somewhat quietly pointed toward combined EV-autonomous undertakings as being the carmaker’s future.
On a call with the news media after GM reported its Q4 and full-year 2019 results (they were a slight beat), CFO Dhivya Suryadevara said that autonomy was a “phenomenal” business opportunity.
“It rivals what you see in the core business,” she said.
Both Ford and GM are less preoccupied with financial bigness than they are with operating sound businesses and tackling new opportunities. GM, for example, never talks about US market share anymore; in its 1950s heyday, the carmaker controlled half of all US sales. A better competitive environment has relegated that to the past, and GM isn’t foolish enough to waste resources on trying to regain that position.
Tesla also wants to operate a sound business, but it is unfortunately highly reliant on equity to fund its operations. This is why the stock story is so important for Tesla (the bond and cash stories matter more for Ford and GM, although with Cruise, GM has demonstrated that it’s possible to build an equity narrative in a mature firm).
The stock story is a distraction
But the stock story is a distraction. It makes sense for Ferrari to have a $32 billion market cap while selling 10,000 vehicles per year because Ferrari sells those cars at really, really high prices. It doesn’t make sense for Tesla to be more valuable than Volkswagen when 98% of global car sales are inaccessible to Tesla because that vast majority of buyers doesn’t want an all-electric car — and even if they did, couldn’t handle the cost of a Tesla (even the relatively cheap Teslas sell for $10,000 more than the historically elevated average sales price in the US, about $35,000).
For what it’s worth, VW holds a worldwide market share of around 12%; Tesla’s is 0.5%.
Tesla as an investment is consequently a rather large and risky bet on a future that hasn’t arrived yet. The stock is pricing in some patently absurd growth that both isn’t going to materialize, even in a best-case scenario, and that wouldn’t be cheap to capture even if it did arrive. Think about it: For Tesla to grab even 5% of total global sales, it would require a new factory for every half-point to point of share.
Nobody ever talks about this, but it’s one of the clear reasons why GM is so focused on ride-hailing and sharing as its largest growth business: fewer vehicles to build, market, and sell. The traditional industry has been there, done that, and it sees Tesla headed down a familiar, capital-intensive road. Even if Tesla bulls are right and the company can sell millions of vehicles in the coming years, it might collapse under the cost of having to satisfy that demand.
So, two markets: one huge, often profitable, not growing; the other tiny, infrequently profitable, growing, but very expensive to expand.
You have to ask yourself if Ford and GM and wrong to be thinking about getting smaller.