What’s Tesla Worth?

When shares of Tesla (TSLA) surged through $300, the media focused on the fact it’s $48 billion market capitalization was now larger than Ford (F) and nearly equal to General Motors (GM).

There was one question everyone, especially the bears, were asking though – how can Tesla, which makes a fraction of the number of cars, losing money on each one, be worth more than two larger car companies?

I had long been one of those bears, back in 2015 I tried to make a valuation case for shares only being worth $100, more recently predicting many of Trump’s policies, from favoring fossil fuel to not eliminating government subsidies, would negatively impact Tesla. These have clearly been wrong.

Part of my mistake, and what the current comparisons to GM or Ford get wrong, is treating Tesla as simply a car company. And while I’m still skeptical regarding Tesla’s ultimate future I’ve come to around to acknowledge when you view Tesla as a Technology company instead of a car company, the game changes completely.

But it’s understandable why the comparisons are made; after all its main products are cars. And those who know the auto industry, such as the legendary Bob Lutz, have been a long time critic of Tesla, calling the company shareholders a cult and in a recent interview in the LA Times saying, “I don’t know why it is that otherwise intelligent people can’t see what’s going on there. They lose money on every car, they have a constant cash drain, and yet everybody talks as if this is the most miraculous automobile company of all time.”

And it’s true, from a strictly car production standpoint Tesla doesn’t really have any special or exclusive technology, all automakers are making or plan to have electric vehicles using lithium-ion batteries with a 200-300 mile range. But right now the business equation on electric cars is wrong. They cost more to build than the public is willing to pay.

Critics argue the major car companies will let Musk spend a ton of money, raise awareness and appeal of electric, and then they can move in and grab market share on a more profitable scale.

Whether this scenario bears out or not, the fact is Tesla has been able to raise the gobs of cash it needs to fuel its growth plans. It recently announced Chinese firm Tencent took a 5% stake in the company, essentially gobbling up the full amount of a secondary and debt offering.

And it is for the first time hitting its production goals; it recently reported selling 25,000 cars during the first quarter, above the 24,700 estimate and currently has over 500,000 reservations for its Model 3, which it hopes to start delivering in mid-2018.

So even as strictly a “car” company, Tesla might survive and thrive. But that wouldn’t justify the current valuation.

Eco-System

Instead, what bullish investors are counting on is what Morgan Stanley analyst Adam Jonas describes as “a revolutionary energy company with a captive ecosystem of data-collecting transport machines and living quarters.”

That’s a fancy of saying Musk’s overall long-term plan is the combination of his SolarCity to create and store the battery power needed not just for the cars but the home and possible resale back onto the electric grid.

Indeed Tesla recently filed a patent application that could change the way homes and businesses store electricity as off-grid power continues to make inroads. The transition from fossil fuel transportation to electric, the technology’s goal is to allow batteries from different makers and with different designs and technologies to work in series and be far more scalable than anything currently available.

Meaning Tesla could control not only the production of power, but also the devices needing it and the data created from its use. How much that could ultimately be worth is anyone’s guess.

— Steve Smith

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