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’

The Daily Telegraph - Business - - Business Comment -

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.

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