Is Tesla’s valuation justified?
At the end of last month, Tesla reached a market valuation of $1TN, making it the first automaker ever to achieve that result. Tesla's share value has risen by +45% YTD and by +3,025% in five years.
There is some skepticism around the valuation that the market gives to the company. Many investors consider the company overrated; in fact, Tesla's market cap is way higher than each of the other nine automakers that have gone public.
One thing is sure: the growing interest in EVs is a crucial factor in Tesla's growth. EV offering has risen by +37% over the last year, and in the US, EV + Plug-In sales are expected to amount to more than 50% in car sales by 2030. Furthermore, over the previous year, EVs + Plug-Ins amounted to 10% of market share in Europe's auto market.
Figures 1 & 2: A brief comparsion between Tesla and its competitors
To gain a better understanding of how accurate this Trillion-dollar valuation is, we can look at how Tesla performs relative to other prominent automakers. In 2020, 63.8 million cars were sold worldwide, whilst only 500,000 of these were Teslas. This means that a company whose market cap constitutes 41.5% of the industry as a whole, has less than 1% of market share; suggesting that Tesla isn’t performing well compared to the wider automotive industry. However, it is important to consider Tesla not only as an automaker, but as a manufacturer of EV’s.
Tesla is the largest manufacturer of electric vehicles by a considerable margin. The company has a 25% market share in EV’s, and their closest competitor, the Volkswagen group, sold only 220,000 plug-in electric vehicles in 2020, less than half of Tesla’s figures. This shows that the EV giant is well positioned to capitalize on the immense growth that the electric vehicle market is expected to experience in the next ten years. Projections forecast the sale of 4.4 million EV’s in 2021, with 1 million expected to be Teslas. In 2030, there are expected to be more than 145 million EV’s on the road. These numbers will continue to grow rapidly in the Western world as sustainability becomes more important. However, skeptics also have doubts on Tesla’s long-term performance in the EV market.
Whilst they were the first to establish themselves in this growing space, Tesla is going to face massive competition from other automotive giants. General Motors and the Volkswagen group both have established supply chains, extensive distribution networks, and vast experience with R&D. Tesla is no longer the leader in battery technology, as other companies have been able to pump cash into catching up. Volkswagen earmarked €73 Billion for the development of future electric vehicle technologies between 2021 and 2025. These efforts are working. Volkswagen sold 170,000 EV’s in the first half of 2021 alone, up 165% from the year before. These growth stats are unrivalled, and it’s only a matter of time before they will catch up completely.
Additionally, Tesla is set to face growing competition, in Asia, from Nio and Xpeng; the two Chinese companies have a market capitalization of $70BN and $40BN, respectively, and are expected to grow even more in value. Goldman Sachs, for instance, advised its clients to consider buying Nio’s stocks as it expects a 60% growth in shares value. Xpeng, on the other hand, has delivered 66,542 vehicles YTD, registering a 289% year-on-year rise, with an expectation of an even more prominent growth shortly. It appears that Tesla’s valuation isn’t justified in the context of its performance in the automotive industry, and this isn’t the only concern for investors.
Supply Chain and Commodities
The global economy is still recovering from the pandemic. The restrictions introduced to fight the spread of the Covid-19 have caused, among the other problems, many delays in the supply chain, determining the so-called "Supply chain crisis." The supply-chain crisis results from three key factors:
1) A shortage in workers,
2) An un-calculated surge in production and consumer demand,
3) Covid-19 disruption.
During the pandemic, manufacturing and moving goods became more arduous due to the governments' restrictions. Many factories shut down or were forced to reduce production because workers were sick or in lockdown. In response, shipping companies cut their schedules in anticipation of a drop in demand for moving goods worldwide, which turned out to be a mistaken strategy. The prediction made (the decline in consumer demand) turned out to be completely wrong. Over the last year, in fact, consumers' demand has been surging at high rates, returning to pre-pandemic levels.
In addition to the wrong choices, companies involved in the supply chain processes are facing a problematic shortage of workers, especially warehouse workers and truck drivers. Two of the largest US ports saw a 30% increase in goods going through them while processing the cargo with 28% fewer workers.
In July, the US Labor Department reported that the warehouse industry had a record 490,000 job openings. Meanwhile, the trucking industry has a shortage of over 80,000 drivers.
A combination of the surge in consumer demand, the supply chain crisis, and the Covid-19 disruption, determined another huge problem: a shortage in raw materials and commodities. The immediate result is that industries are struggling to make and ship their products to meet consumer demand. Toyota and Apple declared a production cut publicly due to the shortage in microchips. Microchips are indeed essential to the functioning of electric devices and Plug-In cars. Mondelez expects to raise prices by as much as 7% in the US from January 2022.
Additionally, prices for ‘green’ metals, essential for the production of Lithium batteries, are at record highs. Nickel is at $20K/tonne, Copper is at $10K/tonne, and Lithium and Cobalt are at $200K/tonne and $60K/tonne respectively. This will raise manufacturing costs considerably and disproportionately affect Tesla’s revenue compared to other automakers as they can’t rely on the more stable costs associated with manufacturing non- EV’s. Elon Musk expects to raise Tesla production over the following year. However, it is hard to say that Tesla won't be affected by any of these problems, a point that was stressed by both Bernstein and Bank of America. Besides, Bernstein put a 12-month price target of $300.
When we look past the exiting headlines about Elon Musk’s innovative ideas and actually dissect the fundamentals of Tesla’s position, it becomes clear that a $1 Trillion valuation is an absurd figure. Tesla isn’t a serious player in the global automotive industry and their advantages in EV’s are quickly dwindling. In the short term they’re likely to suffer too. Supply chain issues have all but halted production and record highs for commodity prices have bitten into their already thin margin
Written By: Ali Chaer, Gustaf Cramér