James Titcomb Tesla’s value is justified if it becomes the iPhone of cars
At $380bn, the electric carmaker has eclipsed its rivals in the motor industry, and if it can perfect self-driving tech it will be worth it ‘Plainly, comparisons to the rest of the motor industry are missing something’
We are running out of ways to put the rise of Elon Musk’s Tesla into perspective. In April 2017, the company’s value hit $49bn (£37bn) and surpassed Ford, a century-old titan that sold roughly 100 times as many cars as its electric counterpart. At the start of this year, it overtook General Motors and Ford combined, and in July became the world’s most valuable carmaker, leapfrogging Toyota. Less than two months later it has risen another 70pc, and today its value sits at $382bn, slightly less than the value of the four next biggest manufacturers – Toyota, Volkswagen, Daimler and Honda – combined. Musk’s own net worth is on track to reach $100bn soon, making him the world’s fourth “centibillionaire”.
Plainly, comparisons to the rest of the motor industry are missing something. Sales of Tesla’s vehicles are growing strongly, rising 50pc to 367,500 last year, but would have to reach 30m – almost half of global motor sales – to match those of the four companies its valuation is equal to. Even the most strident fans of the company, of which there are many, are unlikely to believe that will happen. But that is not the vision Musk is selling, or that its backers believe. On Wall Street, Tesla is increasingly being perceived as a tech company, rather than a car manufacturer.
It is natural to look at a company’s traditional competitors when valuing it; that is the closest yardstick we have. But this is often short-sighted.
After Uber secured a $17bn valuation in 2014, Aswath Damodaran, a finance professor at New York University, calculated that the true value of the company was $5.9bn based on global demand for taxis, which was estimated at around $100bn.
As one commentator put it, this was like valuing the car industry based on demand for horses in 1910: Uber didn’t just eat into the taxi industry, by making it easy for people to get a ride it vastly expanded the market. Despite a disastrous few months, today Uber is now worth 10 times what Damodaran said it was. Another example lies in Apple, which last week hit a $2 trillion valuation, most of that down to sales of the iPhone. When the iPhone was first released 13 years ago, Nokia dominated the market, but its market value hit a peak of around $150bn, less than a tenth of what Apple is worth today. Both have the same core business of selling mobile phones, but that severely misrepresents the dramatic difference between the market in 2007 and today. Mobile phones were hardly a nascent product in Nokia’s heyday – more than a billion phones were sold in 2007 – but they were not nearly as profitable or central to our lives.
Tesla vehicles are often compared to iPhones, both because of their loyal fanbases, and the fact that using one simply feels different to what came before. Those who own its shares would suggest that cars are undergoing a similar revolution to what happened to mobile phones a decade ago.
If that is a valid analogy, we must question whether cars have the potential that the smartphone did in 2007. Vehicles are designed to get us from A to B, and already do that relatively well. The day-to-day savings and environmental credentials of electric cars are significant attractions, but on their own do not constitute an iPhone-sized leap.
What would count as such a step change, at least in Musk’s mind, is self-driving tech. Last month, he said that upgrading Teslas to drive themselves might represent “the biggest asset value increase in history”. He said a self-driving software update could, overnight, make a million Tesla cars already on the road, in his estimate, five times more valuable than they are today.
This apparent value increase would come in two ways. One is that owners could rent their cars out as self-driving taxis. The other is the time they would get back by not focusing on the road. Musk believes Tesla can profit from that time: it has already put games in its touchscreen, for example. To true believers, this all adds up. If you can make thousands from your Tesla robotaxi while the alternative would be leaving it idle in a car park, the company’s advantage over incumbents starts to look Apple-esque.
This is a big if, of course. It relies on two assumptions. The first is that traditional carmakers will not rise to the challenge of following Tesla. There is some merit to this: rivals’ attempts to make a competitive electric vehicle have been dismal. The second is that Tesla’s autonomous driving efforts pay off. Ark Invest, one of Tesla’s biggest supporters, says the company is worth a maximum of $3,400 a share if it can’t pull off autonomous driving, but $22,000 if it can.
On this, there are reasons to be sceptical. Musk insists Tesla is making great strides in self-driving, saying his car can now largely drive itself to work and that the technology will be ready this year. But he has consistently over-promised and under-delivered in this area.
The jury is still out. But if Tesla can do for cars what the iPhone did for mobile phones, its recent share boom does not look entirely unjustified.