|        About Good Returns  |  Advertise  |  Contact Us  |  Terms & Conditions  |  RSS Feeds

NZ's Financial Adviser News Centre

GR Logo
Last Article Uploaded: Tuesday, August 3rd, 2:03PM


Investment News

What Elon Musk’s new title might mean for markets Or … Tesla’s share price, intrinsic value or market madness

In this article we discuss the valuation rationale for Elon Musk’s largest asset, Tesla.

Wednesday, February 3rd 2021, 9:07AM

by Richard Stubbs

On 7th January Elon Musk became the wealthiest man on Earth and Mars. This was in large part due to the astronomical rise in the price of Tesla shares that he owns.

Tesla is now worth $780bn US dollars and is the 4th largest company on US share market, behind only Apple, Amazon, and Microsoft. It is by far the most valuable automobile company in the world, the next most valuable being Toyota Motor Company at $240bn US dollars. An owner of all of Tesla’s shares could currently sell them and buy three Toyota Motor Company’s and have a handy chunk of change left over.

The table below compares Tesla to 3.2x Toyota Motor Companies. 3.2 Toyota Motor Companies would be producing 57x more cars, receiving 28x more revenue and have 57x more assets than Tesla.

Measure Tesla 3.2x Toyotas Difference 
Market Capitalisation $US 783bn $US 783bn   
Revenue $US 28bn  $US 777bn  28x 
Net Profit $US 660m $US 46.9bn 71x 
Net Tangible Assets $US 16bn  $US 599.2bn  36x 
Units delivered in 2020 500,000  28,397,303  57x 

Source: Bloomberg, Revenue and Net Profit based on year to 30 September 2020

Tesla is undoubtedly a great company. It is highly innovative, has a strong culture and is executing its strategy well. But there is a lot of work to do before it makes a level of profit and revenue that might justify its current share price. Tesla would have to grow its revenue nearly 40% each year for the next 10 years to get to the revenue of 3.2x Toyotas. 

While Tesla is a great company, the automotive manufacturing industry is terrible. Automotive manufacturing is highly competitive. There are limited barriers to entry and there is low brand loyalty. This results in low profit margins and low returns on capital. History is littered with failures. Warren Buffett famously noted that “when a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” 

In competitive industries it is almost impossible to maintain a market share of much more that 20%. Toyota currently has a 10% global market share. 3.2x Toyotas would have over 30%. This just doesn’t look possible. 

It is also likely that any shareholder of Tesla will need to front up with more cash over time, as Tesla will undoubtedly need more capital if it is to achieve the high levels of growth needed to justify its share price. 

Perhaps the best rationale for Tesla's share price is the potential for it to diversify into other sectors given the highly innovative culture that exists there, a bit like how Amazon went from a book seller to the leading provider cloud services. Tesla is already more than a car company, and some argue it is better described as an energy distribution business. But non-car revenues currently only make up 10% off the total revenue. 

We do not have a crystal ball at Castle Point and cannot tell you whether Tesla manages to achieve the lofty levels of growth required to justify the share price. But we can tell you that you are paying a lot now for the privilege of finding out. 

To us Tesla’s recent share price rise looks more to do with over-exuberance in some segments of the market. Recent share trading in Tesla share has been extreme. On Friday 8th January it turned over $62bn worth of shares which was more than the next 10 stocks combined. 

Perhaps Jeremy Grantham at GMO summed it up best in his recent newsletter where he compares some of the current market behaviour with the behaviour in 1929 before the crash. “As a Model 3 owner, my personal favourite Tesla tidbit is that its market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM. What has 1929 got to equal that?”. 


The following commentaries represent only the opinions of the authors. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement or inducement to invest. All material presented is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Castle Point may or may not have investments in any of the securities mentioned. 

About Castle Point Funds Management Limited 

Castle Point is a New Zealand boutique fund manager, established in 2013 by Richard Stubbs, Stephen Bennie, Jamie Young and Gordon Sims. Castle Point’s investment philosophy is focused on long-term opportunities and investor

alignment. Castle Point is Zenith FundSource Boutique Manager and Australasian Equity Manager of the Year 2019.

About Richard Stubbs 

Richard Stubbs is a co-founder of Castle Point. He has a Master of Commerce in Finance and a Bachelor of Science from Auckland University and has published academic articles on long run returns in New Zealand.

Richard is the co-founder of Castle Point Funds Management. Previously he was Head of Equities for Tower Investments in Auckland.

Tags: Castle Point Funds Management

« On the industry play-list: four chart-topping regulations for 2021Effective vaccine, better earnings spur on markets »

Special Offers

Comments from our readers

No comments yet

Sign In to add your comment



Printable version  


Email to a friend

Good Returns Investment Centre is brought to you by:

Subscribe Now

Keep up to date with the latest investment news
Subscribe to our newsletter today

Edison Investment Research
  • Murray Income Trust
    18 May 2021
    Maintaining a commitment to quality and income
    Murray Income Trust (MUT) invests in a diversified portfolio of mainly UK equities. It focuses on quality stocks and aims to provide a high and growing...
  • Acorn Income Fund
    18 May 2021
    Board proposes change of mandate and manager
    The board of Acorn Income Fund (AIF) has announced the results of its strategic review ahead of the company’s five-yearly discontinuation vote in...
  • Canadian General Investments
    17 May 2021
    Building on strong long-term performance record
    Canadian General Investments (CGI) has been managed by Greg Eckel at Morgan Meighen & Associates (MMA) since 2009. He comments that his strategy of investing...
© 2021 Edison Investment Research.

View more research papers »

Today's Best Bank Rates
Rabobank 0.75  
Based on a $50,000 deposit
More Rates »
Cash PIE Rates

Cash Funds

Institution Rate 33% 39%
ANZ 0.10    0.10    0.11
ASB Bank 0.05    0.41    0.42
ASB Bank 0.05    0.59    0.56
ASB Bank 0.05    0.61    0.64
ASB Bank 0.08    0.66    0.69
ASB Bank 0.08    0.72    0.75
BNZ 0.10    0.10    0.10
Heartland Bank 0.40    0.40    0.40
Kiwibank 0.05    -    -
Kiwibank 0.25    -    -
Nelson Building Society -    -    -
SBS Bank -    -    -
TSB Bank 0.25    0.25    0.26
Westpac 0.35    0.36    0.38
Westpac 0.05    0.05    0.05
Westpac 0.35    0.36    0.38

Term Funds

Institution Rate 33% 39%
ANZ Term Fund - 90 days 0.35    0.36    0.37
ANZ Term fund - 12 months 1.20    1.23    1.28
ANZ Term Fund - 120 days 0.45    0.46    0.48
ANZ Term fund - 6 months 0.80    0.82    0.85
ANZ Term Fund - 150 days 0.55    0.56    0.59
ANZ Term Fund - 9 months 0.90    0.92    0.96
ANZ Term Fund - 18 months 1.20    1.23    1.28
ANZ Term Fund - 2 years 1.45    1.49    1.55
ANZ Term Fund - 5 years 1.95    2.01    2.10
ASB Bank Term Fund - 90 days 0.35    0.36    0.37
ASB Bank Term Fund - 6 months 0.80    0.82    0.85
ASB Bank Term Fund - 12 months 1.20    1.23    1.28
ASB Bank Term Fund - 18 months 1.25    1.28    1.34
ASB Bank Term Fund - 2 years 1.30    1.33    1.39
ASB Bank Term Fund - 5 years 1.75    1.81    1.89
ASB Bank Term Fund - 9 months 0.80    0.82    0.85
BNZ Term PIE - 120 days 0.45    0.45    0.47
BNZ Term PIE - 150 days 0.60    0.61    0.64
BNZ Term PIE - 5 years 1.80    1.86    1.94
BNZ Term PIE - 2 years 1.35    1.38    1.45
BNZ Term PIE - 18 months 1.25    1.28    1.34
BNZ Term PIE - 12 months 1.20    1.23    1.28
BNZ Term PIE - 9 months 1.10    1.13    1.18
BNZ Term PIE - 6 months 1.00    1.02    1.07
BNZ Term PIE - 90 days 0.35    0.35    0.37
Co-operative Bank PIE Term Fund - 6 months -    -    -
Heartland Bank Term Deposit PIE - 12 months 1.30    1.33    1.39
Heartland Bank Term Deposit PIE - 6 months 1.00    1.02    1.07
Heartland Bank Term Deposit PIE - 9 months 0.90    0.92    0.96
Heartland Bank Term Deposit PIE - 18 months 1.15    1.18    1.23
Heartland Bank Term Deposit PIE - 2 years 1.20    1.24    1.28
Heartland Bank Term Deposit PIE - 5 years 1.75    1.81    1.89
Kiwibank Term Deposit Fund - 90 days 0.35    0.36    0.37
Kiwibank Term Deposit Fund - 6 months 1.05    1.08    1.12
Kiwibank Term Deposit Fund - 12 months 1.20    1.23    1.28
Kiwibank Term Deposit Fund - 150 days 0.60    0.61    0.64
Kiwibank Term Deposit Fund - 120 days 0.45    0.46    0.49
Kiwibank Term Deposit Fund - 9 months 0.95    0.97    1.00
Westpac Term PIE Fund - 150 days 0.60    0.61    0.64
Westpac Term PIE Fund - 120 days 0.45    0.46    0.47
Westpac Term PIE Fund - 18 months 1.25    1.28    1.34
Westpac Term PIE Fund - 12 months 1.20    1.32    1.38
Westpac Term PIE Fund - 6 months 0.80    0.81    0.84
Westpac Term PIE Fund - 9 months 1.00    1.02    1.07
Westpac Term PIE Fund - 90 days 0.35    0.36    0.37
Westpac Term PIE Fund - 2 years 1.45    1.49    1.55
About Us  |  Advertise  |  Contact Us  |  Terms & Conditions  |  Privacy Policy  |  RSS Feeds  |  Letters  |  Archive  |  Toolbox  |  Disclaimer
Site by Web Developer and