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Tesla has been making headlines lately, for good reasons.
First, Tesla crossed the trillion-dollar market cap on 21 Oct 2021. Tesla is the 6th American company to have achieved this feat, after Apple, Microsoft, Amazon, Alphabet, and Meta. And it isn’t just about joining the 4 commas ($1,000,000,000,000) club; Tesla did it faster than the other members:
Second, Elon Musk became the first person to achieve a net worth of US$300 billion on 28 Oct 2021, according to the Bloomberg Billionaire Index. He is now way ahead of second-place Jeff Bezos by US$142 billion or 74% higher (chart below is based on 2 Nov 2021).
Third, Tesla broke record in delivering 241,300 EVs in 3Q2021. Their execution has been fantastic, and Tesla is capturing this new market fast. The chart below shows their track record in deliveries, and it has reached a tipping point and the growth has turned exponential.
Fourth, we too can witness the impact of Tesla in small sunny Singapore. I believe you have started seeing more Tesla cars on the road. New registrations for Tesla began to pick up in the last few months – 165 in Aug 2021 and 314 in Sep 2021. It became the best-selling sedan and the best-selling EV in Singapore for the month of Sep.
Fifth, the third largest shareholder of Tesla happens to be a Singapore retail investor. He came out of the shadow and gave an interview to Bloomberg and his stake is worth a whopping US$7 billion. That’s richer than banker Wee Cho Yaw!
Such stories can inspire people to take more risks with their money but I don’t recommend you to dump your entire net worth on any single stock. At least not for most people who cannot suffer the consequences of getting the investment wrong.
That said, Tesla is standing on the podium celebrating its wins and nothing seem to be able to stop the company.
Latest update on Tesla:
Is it too late for you to invest? Let’s look at the addressable market, competition and Tesla’s valuation.
Tesla’s addressable market
I believe most people expect electric vehicles (EVs) to replace internal combustion engine (ICE) cars eventually. There are 1.4 billion vehicles in the world and only about 10 million EVs currently. This transition is going to take a long time and we do not know when the roads would be fully electric.
In terms of sales, there were 64 million cars sold globally in 2020 (according to Statista) while Tesla sold less than 500,000 cars in 2020.
Assuming Tesla achieves a 20% market share globally, that would mean annual sales of 12.8 million cars. That’s 25x from the current figures! There is still a lot of room for Tesla and its ability to win market share.
These numbers are just for cars and do not include other vehicle types such as bikes, trucks and buses, which Tesla can venture into too. For example, Tesla Cybertruck is one.
Tesla has offered solar panels and solar roofs for sale in the U.S. They are not a significant contribution to Tesla’s revenue yet, but this opens up a new market that is separate from EVs. This makes Tesla a new energy company rather than a car company. That positioning would widen the addressable market to that of the other renewable energy and big oil companies.
There is no doubt that Tesla’s addressable market is huge and could be expanded further. With exceptional execution ability, it is undeniable that Tesla will enjoy many years of growth. It is still early days.
Tesla’s competition
I did a YouTube video comparing Tesla and other hot EV startups (NIO, Xpeng and Li Auto) in end-2020 and concluded that Tesla is still a clear leader, even against stalwart BYD. But I felt that the valuation was rich. What is high can go even higher as today’s market has become more extreme. The share price has gone up 147% since I did the video!
Tesla faces 3 main groups of competitors:
- EV Startups: NIO, Xpeng, Li Auto
- Incumbent auto makers: BMW, Volkswagen, Toyota, BYD
- Tech companies: Apple, Xiaomi, Huawei
The incumbent auto makers post the biggest threat, but Tesla still leads all of them.
Another unique part of Tesla is that it is a vertically integrated company. I see it as an Apple Inc in cars but a more integrated version considering Apple outsourced its manufacturing. Tesla controls the design and the customer touchpoint from the start to the end.
Having control of the entire process means your design is unique and branding is strong.
I see that Tesla has brand equity that is as strong as Apple. The Tesla brand is the strongest among all the EV competitors, which itself is a competitive advantage and they will be able to charge a design premium on their products and services like what Apple does.
Apple doesn’t have more than 50% of the smart phone share globally. In fact, it doesn’t have the majority share, losing to Samsung and Xiaomi. But Apple is the most profitable. Similarly, Tesla may not need to win majority share of the EV market and it could already be the most profitable.
Tesla’s Valuation
With all the good news about Tesla, it is hard to say that Tesla shares are selling at reasonable prices. Case in point, it is trading at its all time high at the point of writing!
Tesla’s Price/Sales ratio history tells us that it is trading at the highest level too.
Tesla turned profitable in 2020 and its Price/Earnings Ratio has declined from over 1,000 to below 500. This is a sign that Tesla is improving its profitability and this trajectory should continue as they achieve greater economies of scale.
Against its competitors, Tesla’s market cap is more than several of them combined:
Compared to other hot EV startups, Tesla valuation is also richer. It should be richer because of Tesla’s leading position but how much richer should it be?
- Tesla: P/S 24x
- Xpeng: P/S 22x
- Nio: P/S 15x
- Li Auto: P/S 14x
As I mentioned earlier, Tesla share price was overvalued at $489 last year when I covered the video. Today it is $1,209. Even more overvalued.
But the thing is, borrowing from a phrase from Morgan Housel, ‘good companies always look overvalued’. And I have missed out many crazy runs because I always felt the stocks were too expensive.
This was what Morgan Housel said during FinTwit Summit 2021 and it made a lot of sense:
One thing that has been persuasive to me over time, is that good companies always look overvalued. Always.
If we are talking about individual stocks, not about market as a whole, valuation as a tool for stock picking is overrated.
This is not contradicting anything from Graham or Buffett. This is kind of fundamental to Buffett’s career – good companies have high valuations.
That was what Munger brought to the partnership. It was different in Graham’s time and Munger realised good companies should be expensive.
If you looked at the history of Berkshire’s acquisitions that really moved the needle, they paid up for those companies. They did not buy those companies at cheap prices.
If you think Warren Buffett is a value investor, of course he is. But he was willing to pay up for good companies.
During what percentage of Netflix’s stock history has it look cheap? The stock is up 500-fold, it is never cheap. Same as companies like Visa, Mastercard, or what not. Valuation as a tool can be difficult there. Or the nuance there is that you need to understand that good companies aren’t going to trade at 3 times cash flow, it just doesn’t happen.
Hence, if you really think Tesla is going to win the EV race, how about buying 1 share of Tesla and adding more if the price comes down instead of just waiting?
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