Equity investors seem to regard Tesla as the future leader of the global affordable luxury car segment. The company’s current market capitalisation already roughly matches that of BMW - nothing that a giant dose of imagination and creativity can’t possibly justify.
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We are in September 2027. The
electric car revolution made Tesla the world’s leading affordable luxury carmaker
– the new BMW. Tesla’s 2027 car sales are expected to reach USD 120 billion
(matching BMW Group’s sales in 2017).
Tesla has a similar net profit
margin (7.4%) and is trading at a similar PE multiple (7.4x) as BMW was 10
years ago. Its market capitalisation just hit USD 68 billion. It was USD 61
billion in September 2017. As no dividends were paid out over the past 10
years, Tesla shareholders earned a 1.2% annualised return in 2017-2027. They
are disappointed.
When buying Tesla shares in
September 2017, they had a vision: Tesla would become the new BMW in 10 years
time. Accordingly, they expected to make a 10% annualised return on their
investment. They would have made it – if they had bought Tesla shares 56% below
the then prevailing market price.
That’s not a very realistic vision
of Tesla’s future, some enthusiastic Tesla investors may now argue. BMW’s
current PE multiple is depressed. In 2027, a very successful Tesla will trade
at higher multiples.
Ok. Let’s think about an alternative
future. In September 2027 the new BMW – aka Tesla – will trade at 10x earnings
2028 (post dotcom bubble BMW only traded, on average, higher in phases of
depressed earnings during recessions). This would translate into a 2017-2027
annualised return of 4.3% - assuming that no further equity or quasi-equity
financing will be needed over the coming years. Factor in a 10% capital
increase (i.e. USD 6bn - Tesla’s cash burn rate in 1H2017 was USD 2.4billion,
USD 3 billion of cash is left on the balance sheet) and the resulting dilution
would lead to an annualised return of 3.3%.
But, hold on, Tesla is not only
cars! What about the energy generation and storage business? Sure - currently
it accounts for 10% of Tesla’s sales. Therefore, even if it was able to mirror
the growth and profitability of the car business in the Tesla-is-the-new-BMW
scenario over the next 10 years, it would hardly move investors’ return-on-investment needle.
Imagination and optimism are good
things. They cannot change the big picture: even if Tesla turns out to be the
new BMW, with a successful energy and storage business attached, it is doomed
to be a poor investment.
It’s what usually happens when a
stock is priced for perfection.
