What makes Tesla,
the world’s leading automaker by market cap, so valuable? The obvious answer would be that it sells hundreds of thousands of cars every quarter, for which it can command a tidy premium because of how much the Tesla name is worth. When it rolls out something new — no matter how odd-looking — Tesla fans are willing to put up money for the right to order a vehicle years later. As many of the world’s biggest economies try to transition away from internal combustion, Tesla is as well positioned as anyone to benefit immensely.
But according to one of its biggest boosters on Wall Street, Tesla’s core business of selling electric cars only contributes so much.
“Global EV momentum is stalling,” wrote Morgan Stanley analyst Adam Jonas, a longtime Tesla booster, in a research report released Monday. “The market is over-supplied vs. demand. We anticipate Tesla’s 2024 outlook to be cautious on volume and profitability.” He marked down his estimate for Tesla’s 2024 sales to 2.08 million units, compared to his previous estimate of 2.25 million, with profitability falling thanks to the aggressive price cuts the company instituted last year in a bid to juice sales. Then came the thing that really hurt: Jonas also adjusted his price target for Tesla shares down from $380 to $345 — a figure well north of the $212 the shares closed at on Friday, but still a noticeable cut. Tesla shares traded down 1.5% through Monday afternoon.
For any other car company that exclusively sold EVs, this kind of price target shrinkage would be a serious problem. But Jonas doesn’t see Tesla as a car company. Or, at least, not
just as a car company.
Of the $345 Jonas thinks a Tesla share is worth, only $75 comes from selling electric vehicles. The rest is largely from businesses that either don’t exist for the company, or else don’t generate meaningful revenue compared to selling cars.
Let’s break this down: In its most recent quarter, Tesla had around $23 billion of total revenues, $19.5 billion of which came from selling cars; $1.5 billion came from its energy business, with the remaining $2 billion coming from “services and other revenue,” which include Tesla’s Supercharging network.
To Jonas, however, Tesla “is both an auto stock + an energy, AI/robotics company,” he wrote, adding that “we believe investors should not ignore the continued developments of Tesla’s other bets.” These include things like turning its cars into something more like software subscriptions, which incur recurring revenues (as Tesla already does with its Full Self Driving software) and a robotaxi network that does not yet exist, but which Jonas projects will have 230,000 vehicles by 2030. There are also projects like the Optimus humanoid robot, which Jonas didn’t put a valuation on but thinks that investors should factor in when considering whether to buy or sell Tesla shares.
To get a sense of the gargantuan scale Jonas tends to operate on, last year he wrote that Dojo, the supercomputer Tesla developed for its automated driving system, could add $500 billion of value to Tesla, even though “it is difficult to explicitly validate the many claims Tesla has made about Dojo's cost and performance.” He was confident, however, that “Tesla has a chance of bringing forth a competitive customized solution given the company’s innovation track record and capabilities.”
The idea that Tesla can be more than an electric car company — one that sprouts innovative and profitable businesses, whether from robotics or artificial intelligence — stems almost entirely from the fact that Elon Musk runs it. Musk himself is well aware of this. Last week he wrote on X, “I am uncomfortable growing Tesla to be a leader in A.I. & robotics without having ~25% voting control,” which would be about double the voting power he has now. (That voting power, of course, was substantially diluted thanks to selling billions of dollars of Tesla shares to fund his takeover of now-X, then-Twitter.)
While it’s unlikely that Musk would be able to break off the robots and AI initiatives that literally power Tesla, the threat is enough to spook investors given Musk’s obvious willingness to pursue major projects outside of Tesla (e.g. SpaceX) — and the high valuation those projects can get from investors — not to mention the amount of time and energy Musk spends on them.
You can see the implicit value investors place on Tesla’s (and Musks’s) ability to spin up new businesses not just in Tesla’s high stock price and overall valuation — around $650 billion, compared to $270 billion for Toyota and $50 billion for GM, both of which sell many, many more cars— but also in how investors value Tesla’s earnings.
Tesla’s price-to-earnings ratio, which is essentially the stock price divided by the earnings per share, is around 60, comparable to Amazon or the enterprise software company Workday, companies investors buy for their future growth or profit potential derived from selling software on a subscription basis. Plus, there’s a market mania for anything AI related, as one can see with Nvidia, which makes the chips used by many companies with AI products (including Tesla) and has gained several hundred billion dollars in market capitalization in the last year. One can also see this with Microsoft, whose OpenAI stake only gets more valuable, company drama notwithstanding.
Stolid GM, by contrast, trades at four times earnings, while Toyota is around 10.
While some of this difference can be attributed to the higher prices Tesla is able to charge for its vehicles, that can only account for so much — Tesla’s best-selling cars are its lower-end vehicles, and again, it’s been aggressively cutting prices. And while luxury automakers have higher valuations than mass market car companies, Tesla still trades higher than luxury automakers including Porsche, Ferrari, and BMW.
Jonas said in his note that his high valuation for the company “is highly dependent upon Tesla accruing value as an AI enabler,” and that “any change of organizational or legal structure that impedes Tesla’s ability to participate in the development of AI could be detrimental.”
And Jonas isn’t the only analyst who sees a substantial portion of Tesla’s value being made up of something beyond its current electric vehicle business. “A key to our bullish thesis that all AI initiatives be kept within Tesla,” Wedbush Securities analyst Dan Ives wrote in a note last week. “If Musk ultimately went down the path to create his own company (separate from Tesla) for his next generation AI projects this would clearly be a big negative for the Tesla story.”
Even if Tesla reports a disappointing outlook for its electric vehicles business with its fourth quarter earnings on Wednesday, expect analysts and investors to be interested in what Tesla isn’t doing yet but could be doing in the future — as long as Musk is still there.
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