They just barely became profitable recently. I don’t think P/E is super informative right now.
Like Amazon, they reinvest basically all of what they take in in growth, so don’t end up with much in the way of profit. (Historically they’ve invested more than 100% of what they’ve taken in in growth, relying on selling equity. Recently it’s started to be slightly less.)
So, I think you want to look at revenue, and project revenue growth and future gross margin to get the equivalent of a P/E ratio.
I don’t get how (re)investing should lower the profits? I mean they are buying assets and not burning the cash in the backyard. Are there instant depreciations on investments, lowering the profit?
Buying physical assets generally doesn’t lower profits, but accountants don’t have a good way to treat R&D, or investment in human capital, as investments.
Hmm, good question. I actually don’t have a good sense of how much of that is assets that remain on the balance sheet (e.g. manufacturing equipment) vs stuff like paying their employees to figure out how to make the batteries better, or how to set up the factory more efficiently.
And paying employees to figure stuff out would show up as just costs on the balance sheet, rather than assets, unless you actually patented something, right? (I don’t actually know accounting super well.)
EDIT: It’s intuitive to me though that when you’re growing revenue at 50% annually (as Tesla has since 2013), you’re just not going to be able to spend money as efficiently as when you’re operating at, or close to, the same scale from one year to the next. (That is, efficiently in terms of short-term profit and loss. From a long-term perspective it might be very efficient, if the spending is enabling future growth.)
I’m not sure exactly where that’s most likely to show up on an accounting statement. But I do think it’s what you’d expect by default. And it’s how startups operate. You spend to grow, and you don’t expect to be profitable right away. Tesla should perhaps be thought of as a rare public company that still operates like a high-growth startup.
I think they are likely to grow to 100x their current revenue—reasoning backward from market potential the way a startup investor does, rather than anchoring from their current size.
I think the problem is the path to that 100x seems doubtful. They’d have to have 100x their current manufacturing, which is a very very difficult feat. Startup investors look at huge multiples like that because scaling a computer business is relatively easy. Making 100x the number of cars/battery sales involves (roughly) hiring 100x the number of employees, having 100x the number of factories, 100x the distribution work. Scaling that by 2027 is impractical even if that is their eventual trajectory goal. Meanwhile they’re fighting in an increasingly competitive market.
Ok 100x Tesla’s 2019 gross revenue is a stretch (100 * $25B = $2.5T = half of car industry, 5x Walmart), I didn’t think that through.
For comparison, Toyota’s market cap is $194B and their 2019 operating profit was $22B. Today the market is valuing Tesla at almost Toyota’s level. I’ll say there’s at least a 20% chance that Tesla will surpass Walmart’s revenue in 7 years, i.e. reach double Toyota’s 2019 revenue.
If Tesla can 5x their 2019 revenue (that’s $125B), then they’ll probably grow into their $150B market cap with a normal P/E ratio (I’m assuming higher margins than Toyota).
So yeah, this seems like the consensus guess that the market is pricing in: Tesla keeps getting more powerful every year because it’s building on a bunch of accumulated advantages, until it’s one or two Toyotas, or it could somehow stumble and fire sale.
But now, on top of that, we need to layer on the Elon Musk magic. Beyond 2025, Musk is just getting started. There are going to be “oh shit” moments where threads come together. It’s like when SpaceX recently announced they’re planning to start launching 1,000x more weight into space each year than all the rest of the world’s companies combined (not to mention reusable rockets and Starlink). I can’t invest in SpaceX, but I at least want to be holding tickets to the Elon Musk / Tesla show.
If spacex gets significantly larger than tsla then I can see Musk moving on to spending most of his time there and tsla slowing down on its rocket ship trajectory.
Their P/E ratio implies ~10x future company size already.
They just barely became profitable recently. I don’t think P/E is super informative right now.
Like Amazon, they reinvest basically all of what they take in in growth, so don’t end up with much in the way of profit. (Historically they’ve invested more than 100% of what they’ve taken in in growth, relying on selling equity. Recently it’s started to be slightly less.)
So, I think you want to look at revenue, and project revenue growth and future gross margin to get the equivalent of a P/E ratio.
Good point. I’m not familiar with TSLA, just poking at some sanity checks.
I don’t get how (re)investing should lower the profits? I mean they are buying assets and not burning the cash in the backyard. Are there instant depreciations on investments, lowering the profit?
Buying physical assets generally doesn’t lower profits, but accountants don’t have a good way to treat R&D, or investment in human capital, as investments.
Hmm, good question. I actually don’t have a good sense of how much of that is assets that remain on the balance sheet (e.g. manufacturing equipment) vs stuff like paying their employees to figure out how to make the batteries better, or how to set up the factory more efficiently.
And paying employees to figure stuff out would show up as just costs on the balance sheet, rather than assets, unless you actually patented something, right? (I don’t actually know accounting super well.)
EDIT: It’s intuitive to me though that when you’re growing revenue at 50% annually (as Tesla has since 2013), you’re just not going to be able to spend money as efficiently as when you’re operating at, or close to, the same scale from one year to the next. (That is, efficiently in terms of short-term profit and loss. From a long-term perspective it might be very efficient, if the spending is enabling future growth.)
I’m not sure exactly where that’s most likely to show up on an accounting statement. But I do think it’s what you’d expect by default. And it’s how startups operate. You spend to grow, and you don’t expect to be profitable right away. Tesla should perhaps be thought of as a rare public company that still operates like a high-growth startup.
I think they are likely to grow to 100x their current revenue—reasoning backward from market potential the way a startup investor does, rather than anchoring from their current size.
I think the problem is the path to that 100x seems doubtful. They’d have to have 100x their current manufacturing, which is a very very difficult feat. Startup investors look at huge multiples like that because scaling a computer business is relatively easy. Making 100x the number of cars/battery sales involves (roughly) hiring 100x the number of employees, having 100x the number of factories, 100x the distribution work. Scaling that by 2027 is impractical even if that is their eventual trajectory goal. Meanwhile they’re fighting in an increasingly competitive market.
So you expect them to be 2.5x Walmart’s revenue? Which is the largest company by revenue in the world, in under 10 years?
Ok 100x Tesla’s 2019 gross revenue is a stretch (100 * $25B = $2.5T = half of car industry, 5x Walmart), I didn’t think that through.
For comparison, Toyota’s market cap is $194B and their 2019 operating profit was $22B. Today the market is valuing Tesla at almost Toyota’s level. I’ll say there’s at least a 20% chance that Tesla will surpass Walmart’s revenue in 7 years, i.e. reach double Toyota’s 2019 revenue.
If Tesla can 5x their 2019 revenue (that’s $125B), then they’ll probably grow into their $150B market cap with a normal P/E ratio (I’m assuming higher margins than Toyota).
So yeah, this seems like the consensus guess that the market is pricing in: Tesla keeps getting more powerful every year because it’s building on a bunch of accumulated advantages, until it’s one or two Toyotas, or it could somehow stumble and fire sale.
But now, on top of that, we need to layer on the Elon Musk magic. Beyond 2025, Musk is just getting started. There are going to be “oh shit” moments where threads come together. It’s like when SpaceX recently announced they’re planning to start launching 1,000x more weight into space each year than all the rest of the world’s companies combined (not to mention reusable rockets and Starlink). I can’t invest in SpaceX, but I at least want to be holding tickets to the Elon Musk / Tesla show.
If spacex gets significantly larger than tsla then I can see Musk moving on to spending most of his time there and tsla slowing down on its rocket ship trajectory.