Tesla Has to Sell More Cars Than Is Even Theoretically Possible

Here’s a pop quiz for you: In what year did Tesla shoot up nearly 4X, as shown in this chart?

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TSLA Chart

Walter Schloss’s Wisdom

Walter Schloss v S&PWalter Schloss was a legendary value investor and some might call him the last traditional value investor. Schloss was an old school value investor. He looked for bargains on a price-to-book basis, preferring stocks that were trading at 52-weeks lows over other opportunities. He spent several years working with Benjamin Graham before moving off to Read More

I know, it looks like Covid’s meteoric rally, but the correct answer is 2013.

A year after Tesla rolled out its first electric sedan, Tesla S, its stock soared 360%. But investors quickly realized Tesla was way ahead of its time and gave out. For the next six years, Tesla stock went nowhere.

It appears that investors are again putting Tesla in a similar situation. They’ve bid up the stock to a price that suggests it will sell more cars than is even theoretically possible.

I’ll tell you all about that in a moment. But first, let's see what Tesla stock price is telling us.

Tesla's Market Value As An Automaker

At today’s price, Tesla’s market value comes to a staggering $393 billion. That’s nearly 2X more than Toyota—the world’s ex-largest automaker.

But while Toyota shipped 10.74 million cars last year, only 367,500 Teslas rolled out of Gigafactories. Why such a difference?

Is it because Tesla is selling more expensive cars and making much, much more profit from them? That would explain some of that difference. But as it turns out, Toyota earns way more from its cars.

Toyota brings in around $19,000 in sales per car. And last quarter, it earned $0.06 on every dollar in sales it made (net profit margin).

Tesla makes much more per car, around $63,000. But in its most profitable quarter, it earned just $0.015 on a dollar of sales.

By my calculations, Tesla would have to sell 12 million cars a year to make up the difference with Toyota earnings-wise. Here’s what that looks like:

TSLA Chart

But people are banging the drum that Tesla is not an automaker. It’s a tech company and it should be valued as such. Fine...

Tesla’s Market Value As A Technology Company

Let’s stack Tesla up against some of America’s most successful tech stocks.

I’ll use one of the most popular valuation metrics for growth stocks called price/earnings to growth ratio (PEG). Think of it as an “upgrade” to the basic P/E.

In short, it fine tunes a P/E’s reading based on a stock’s expected growth. The higher the expected growth relative to P/E, the lower the ratio. And vice versa.

Here’s a chart that shows the PEG ratios of Tesla, Amazon, Apple, Netflix, and Nvidia:

teslas market value

As you can see, Tesla is ~5X more expensive than the tech stocks flirting with their record highs. I’ve run the numbers to see what Tesla would need to deliver to get in line with big tech.

Turns out, it would have to sell around 1.3 million cars a year to push down its PEG to the big tech level. But is that even theoretically possible?

How Much Tesla Can Really Sell

Before we move on, I have to point out a big flaw in electric car (EV) data. A lot of sales numbers pool battery electric cars (BEV) like Tesla’s with hybrid plug-in electric cars (PHEV).

PHEVs run on both gas and electricity, which Tesla doesn’t make. And so most data in this industry vastly overestimates demand for Tesla cars.

Here’s what global electric car sales look like without PHEVs:

teslas market value

That means Tesla would have to hold a near monopoly on electric cars to bear out its market value. Of course, demand for BEVs will pick up over the years, but so will competition.

Many automakers are quietly plowing tens of billions of dollars into EV technology to catch up to Tesla. And it looks as if they are starting to nail electric cars.

Take VW. This past September, German’s auto giant launched ID.3, its first electric car built from the ground up. And right out of the gate, it’s outselling Tesla 3X in Norway—Tesla’s biggest market in Europe.

Then there’s BYD, “China’s Tesla” backed up by Warren Buffett. This past July, it released its first electric sedan, Han, which will compete head on with Tesla. With 40,000 orders in just two months, it’s expected to become by far the best-selling electric car in China.

Other automakers aren’t sitting idle either.

Slice It However You Want...

But Tesla stands no chance to pull off what’s baked into today’s stock price anytime soon. Neither as an automaker nor as a tech company.

While I hold the utmost respect for Elon Musk and what he’s doing, I just can’t make sense of Tesla’s stock at this price. The irony is that neither can Elon Musk.

When Tesla traded under $100, Musk tweeted “Tesla stock price is too high imo.” Today Tesla is 4X that price.

Of all people, I wouldn’t doubt the man of the show on this.

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