Tesla Back of the Envelope Math

I realized I have barely written about Tesla over the years, even though I have been thinking about it a lot recently.

First thing to know is that the stock at $310 is trading at about 12 times book value. Book value gives them full credit for their acquisition of Solar City (be sure to read the Delaware Chancery opinion) and for their groundbreaking automotive assembly facilities, such as the tent.

Market capitalization of Tesla is currently $53 billion. They are getting close to selling their 200,000th car (cumulative) - at which point their important $7,500 per car tax credit is going to start phasing out. Perhaps they can produce 200,000 cars annually with their current plant; probably not at an overall profit.

The Honda plant in Lincoln, Alabama can produce as many cars as Tesla on just one of its two lines. Honda has 12 plants in the U.S. Their market cap is about the same as Tesla. They sold about 2 million cars in the U.S. last year and 3.7 million worldwide, at an overall average annual profit margin of about 5 percent. Honda automotive plus their other businesses (like motorcycles) earn three to four billion dollars a year.

The market capitalization of Ford is $43 billion, which is only 6 times last year's earnings. They have a 5% automotive operating margin. They sold 2.6 million cars in the U.S. last year and 6.5 million worldwide.

Notice that Ford and Honda each earn about $1,000 net per car sold. For Tesla to justify a higher valuation than either company, it either needs to match that profit per car and sell more, or else have a smaller market but an order of magnitude higher profit per car. The people paying $53 billion for Tesla seem to believe in the higher profit per car scenario.

Ferarri earns about $500 million selling cars at a 15% net margin. They sell under 10,000 units annually at an average of about a quarter million dollars. But Musk's idea has been to move away from high price and margin, low volume, to compete head-to-head against mass market manufacturers like Toyota.

I think what the bulls fundamentally do not realize is what a legitimate premise of a $50 or $100 billion market cap electric vehicle manufacturer would be: a new battery chemistry. If you had invented that and obtained patent protection on it, and assuming it resulted in significantly better energy density and lower $/kwh than current batteries, you would be able to sell a lot of vehicles at an above industry average profit margin.

But... why would you want to? If you invented this better battery, you didn't disrupt automobiles. You disrupted oil. The share of oil used for ground transportation, which could be disrupted by a battery breakthrough, is a $2 trillion annual market. 

Inventing that battery and then building vehicles yourself would require you to raise vast amounts of outside capital to build automotive assembly plants. Honda and Toyota are fantastic at building vehicles and they do it at a 5 percent profit margin. What you would want to do is license your battery to these experienced manufacturers and collect royalty checks based on disrupting owners of oil reserves, not manufacturers of vehicles.

The Tesla battery is a modification of the 18650, which is a 20 year old laptop battery technology. Now you see why they aren't doing a licensing model - there is nothing to license. Instead, with Tesla you are seeing the result of the very arrogant Silicon Valley mentality best expressed by the tweets below,

A key premise for the next decade: it's easier for software to enter other industries than for other industries to hire software people

— Benedict Evans (@BenedictEvans) September 3, 2016

You can see this very clearly in the car industry: if tech companies build cars and car companies hire developers, the former will win

— Benedict Evans (@BenedictEvans) September 3, 2016

My conclusion from this thought experiment is that Tesla is overpriced by an order of magnitude. They are a creature of the quantitative easing bull market that resulted in huge wealth inequality; a temporarily over-earning upper middle class.