The Bizarre Math Behind Tesla’s Valuation

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Tesla’s market capitalization just crossed $300 billion. It’s the largest car maker in the world, even larger than Toyota, which produced almost nine million cars in 2019 and had a market capitalization of $200 billion. Tesla’s market cap implies that its production will go up more than 20-fold from the 400,000 cars a year it produces today to … 10 million cars.

As the market valuation of Tesla raced to the moon, its debt rating remained as junk (Toyota is A+, GM is BBB). The largest automaker in the world is junk-rated.

In the past, I have made the analogy that the transition from internal-combustion engine (ICE) cars to electric motors is akin to the transition from dumbphones to smartphones. It’s a domain shift. So maybe another domain shift will bring higher margins to Tesla, as happened for Apple with the iPhone. Unlike other car makers, Tesla is vertically integrated: It manufactures most of the components that go into its cars (including seats); thus gains from the economies of scale that used to accrue to its suppliers will accrue to Tesla.

Also, software plays a bigger role in a Tesla than in a traditional car. There is self-driving, over-the-air updates, and an iPad-like interface that powers all the controls, for starters. So if advanced software helps Tesla get higher margins than traditional car companies, it may not have to make as many cars to get to Toyota’s profitability. Bulls would even argue that self-driving alone may send Tesla’s margins to the moon. I’d like to pour cold water on that argument: Fully autonomous driving is a good decade away. (I discuss it in great detail here, in my 37-page Tesla writeup).