The Tesla valuation debate

The Tesla valuation debate –are you in or out?

Michael Clough, Analyst at Momentum Global Investment Management, highlights comparative valuation data for the globe’s largest car manufacturer and asks whether a forward P/E ratio of 206x might make investors just a tad nervous?

Let’s start with some high-level numbers. Since the start of 2020, Tesla’s share price is up 877% (to the time of writing on 10 February), its market capitalisation stands at over $780bn (up from $75bn over the same period), making it the 5th largest company in the US equity market, and it stands tall on a forward price/earnings (P/E) ratio of 206x. This compares to other renowned auto manufacturers, such as Toyota and Volkswagen, at markets caps of $253bn and $105bn and P/Es of 14x and 13x, respectively.

EYE-WATERING VALUATIONS

In fact, Tesla’s market cap is now greater than the next nine largest auto companies combined. Of course, to the many willing buyers of Tesla at such high multiples, they see it not just as a typical auto company but something much more, namely a technological and renewable energy disruptor that is driving innovation and thus will be capable of delivering extraordinary growth rates long into the future, not just from electric vehicles but automated vehicles and its renewable energy business. Only then can a reasonable argument be made to support the current valuation of Tesla.

WHAT ABOUT THE COMPETITION?

Whilst hitting or exceeding these lofty growth expectations might prove difficult alone, it becomes even more so when you consider the inevitable challenge from competitors who will eventually catch up with Tesla. For instance, US peers Ford and General Motors have recently committed to invest $22bn and $27bn in electric vehicles by the end of 2025. In Europe, Volkswagen has announced intentions to invest $86bn in electric vehicles and other technologies through 2025. Investment from peers will likely erode Tesla’s 18% electric vehicle market share over the coming years, though admittedly they might become a smaller piece of a much bigger pie.

THE ESG PERSPECTIVE

Tesla is also interesting from an ESG perspective. On the one hand, it produces highly energy efficient (as opposed to fuel guzzling) vehicles. On the other hand, critics have questioned the supply chain and labour management, and the governance of the company, not least the behaviour of CEO Elon Musk that divides opinion but, more so in the past, the board’s close ties to Musk’s other ventures including SpaceX.

An interesting recent development is the company’s decision to invest $1.5bn of balance sheet cash in bitcoin, which if nothing else is a fascinating capital allocation decision given the stark difference in volatility profiles of the two assets. This raises the notion of legitimising the use of cryptocurrencies in the institutional space, but that’s one for another time!

There is no doubt Tesla divides opinion, some love the growth story, others can’t look beyond the valuation. We would fall more into the latter camp today. We have some exposure through our underlying growth and momentum managers, whilst other managers, specifically those providing value and quality exposure, do not allocate. That leaves our Global Equity fund with a 0.8% position (as at end of January) which is below the MSCI World’s 1.2% allocation.

ABOUT MICHAEL CLOUGH

Michael joined Momentum Global Investment Management’s investment team in Autumn 2018 as a research analyst, with a primary focus on manager research and selection. Previously Michael worked for Asset Intelligence Research where he was responsible for manager research and portfolio construction. He has an MSc in Financial Economics from the University of Leicester.