Valuation – TeslaWeekly

I think it’s difficult to compare Tesla’s market cap to typical auto makers because typical auto makers have very low margin, have limited growth prospects, and have limited potential to expand into direct sales and service due to their existing franchisee dealer model.

Further, the auto market is ripe for disruption, and ripe for a tech-orientated company to enter and create a revolutionary product, similar to how the iPhone was revolutionary in the phone market.

Just like there are 100s of types of cars on the market now, it reminds me of the 100s of types of phones in the market before the iPhone. It shows to me the lack of a compelling product. A truly compelling product will take majority market share, just like the iPhone did. In that sense, the auto market is similar to the phone market before Apple entered. It’s ripe and it’s a huge market, arguably larger than the phone market.

So, in this sense, Tesla has the potential to truly be a market disruptor and emerge as the Apple of cars, with exceedingly high gross margins, market share and customer loyalty. But Tesla needs to earn this and execute their way to this potential.

Due to this potential, I think Tesla will always have a higher multiple that investors give for its stock compared to other auto markers, especially as other auto markers get increasingly disrupted. In other words, it’s likely the P/E ratio of legacy auto makers shrink as Tesla’s increases.

In my view, I think the smartest and largest long-term investors are typically looking at TSLA with one lens that is about 2-3 years out and another lens that is 10 years out. The 2-3 year lens sees Tesla reaching certain production goals in 2020-2021 and that revenue, margin, growth, etc all factor into their analysis of how much the company is worth. But also, they view Tesla with a 10-year lens and see the potential it has to be a massive disruptor in a trillion+ market, and they do attribute value to that as well. What % value an investor gives to the 2-3 years lens vs the 10 year lens varies according to investor.