Why Tesla Is Worth More Than GM
technologyreview.com
technologyreview.com
People understand (and the article gives reasons why) "worth more than" to be that the GM brands + factories + assets + future prospects are worth less than Tesla brands + Tesla factories + Tesla assets + Tesla future prospects. But this is not true in actuality. This is because Tesla is worth more than GM based on Market Capitalization, not Enterprise Value. The difference between these companies is that GM has $51B in net debt while Tesla has $2.6b.
If GM wanted to be "worth more than Tesla" (using market cap), they could do it tomorrow by issuing $51B in new stock and paying off their debt. Why doesn't GM do this? Because they actually believe their stock is undervalued, and would rather buy their own stock than sell it.
Debt (leverage) is different across different companies. If you aren't familiar with how different debt levels affect the market cap, the following pages are worth a read:
https://medium.com/@ruzbehb/tesla-is-not-valued-at-more-than...
http://www.investopedia.com/exam-guide/cfa-level-1/corporate...
GM has positive $37 billion in net tangible assets. That has climbed from $27b, to $33.9b, to $37b over the last three fiscal years. Their net balance sheet is not only improving, it's dramatically in the positive.
To go with that, they have $24 billion in cash and are currently capable of earning around $12 billion in net income on an annualized basis (meaning they can easily afford the debt they have just on an income basis).
GM's balance sheet is in dramatically better shape compared to market capitalization vs Tesla. To make matters worse for Tesla, they're still bleeding immense red ink vs sales, having to regularly either raise debt or dilute shareholders to keep operating (GM doesn't have that problem, and doesn't need to eat its balance sheet to operate). That by itself tells you everything you need to know about Tesla vs GM when it comes to balance sheet vs market cap.
Tesla is worth more than GM for one reason: the potential to one day be more profitable than GM, namely that enough shareholders are buying into that premise.
Is Enterprise Value too simple a calculation to compare the companies? (you seem to be looking at the entire balance sheet, not just cash/debt)
Certainly GM could issue stock tomorrow to increase their market cap to be more than Tesla's?
Market cap just seems a bit arbitrary of a metric (as it doesn't take into account cap structure) when you're comparing the value of the digital economy and digital monopolies, etc (as the article does).
That's not how it works. GM issuing shares tomorrow to raise cash, would not inherently boost the market cap. In fact, more likely given the context, shareholders would punish GM and push their valuation down. Shareholders would be spooked by such a move, they'd regard it as a bad sign for GM's operating picture. TSLA & GM are not being treated the same, or valued on the same basis. It's almost identical to the Walmart vs Amazon scenario in that sense.
Cash is essentially never valued at a $1 to $1 basis in terms of representation in the market cap. It's discounted, as for numerous reasons it's not (and shouldn't be) worth 1 to 1 in practical terms.
Debt is also frequently treated very differently from one company to another depending on the context. Comcast for example, has negative $59 billion in net tangible assets, and a mere $4 billion in cash (and most of their 'assets' are goodwill & intangibles); they have a terrible balance sheet. Yet their market cap is $181 billion, to go with $8 billion in net income. Shareholders, for various reasons, are giving Comcast a very sizable multiple and mostly ignoring the balance sheet (ie they don't regard it as a serious threat). GM has a vastly superior balance sheet, six times the cash, routinely ~50% higher quarterly net income, and yet is worth 1/3 what Comcast is.
GM's high revenue/profit vehicles require a lot of gas compared with the lower revenue/profit vehicles and thus the projected cost of gasoline probably is part of the GM valuation. For now, and for the future, thanks to fracking and (relatively) low demand from China, it appears as if GM should be having increased profits.
Regarding, Tesla's valuation, there must be some metric for customer acquisition.
But certainly if the GM entity had $10B more cash tomorrow, it might not be worth $10B more, but certainly it would be worth $5-$10B more (or at the very least >0 more)?
And of course, they could use that $10B to pay off $10B of their existing debt as well.
All I'm trying to say is that you probably shouldn't compare market caps of companies with vastly different capitalization structures to try and deduce a bigger picture idea of the economy. You should look at enterprise value.
http://www.investopedia.com/terms/m/marketcapitalization.asp
No, again, that's not how it works. Shareholders value companies primarily based on a multiple of earnings with an overwhelming tilt toward future expectations, not based on cash. Cash can receive anywhere from a medium to a near-total discount, depending on the context & company. As an easy example: Apple's cash has stopped growing at the rate it used to (they're paying a lot of it out), while it has taken on immense debt in a short time, and its earnings have not expanded in years (in fact they've fallen as with sales, re fiscal 2016 vs fiscal 2015) - meanwhile, its stock has been given an increased multiple lately, AAPL is up 47% (adding $200+ billion in market cap, while earnings went down and debt went up) in the last year despite those theoretical negatives. Why? Shareholders mostly don't care about the accumulated debt or the slowdown in cash accumulation.
There are a few exceptions, for example if a company is under serious bankruptcy risk. That can dramatically damage the valuation given to a company via its income. In that specific case, adding a ton of cash to relieve the bankruptcy risk, can produce a greater than 1x release in value as shareholders shift back to operating fundamentals & future expectations. Valeant Pharmaceuticals is a walking example of that right now. To the extent Valeant manages to lift the dark cloud of bankruptcy off of it, their market valuation will rise (every time they announce they've paid down some debt, or sell an asset for a good price, their stock tends to spike; they have something like $29b in long-term debt and the debt interest is threatening their existence; if they magically added $10 billion in cash tomorrow, their market cap would expand by something near a 1 to 1 basis or likely greater (depending on the bankruptcy pressure, relief from it can generate an amplified upside)). Another exception example: Las Vegas Sands (LVS), the casino giant, was under serious risk of bankruptcy during the economic crash in 2009; its founder, Sheldon Adelson, decided to back the company with a large amount of money, the stock proceeded to increase by 5x to 6x in a matter of a few months afterward, due to the relief that bankruptcy was no longer nearly so likely (shareholders shifted back to valuing the company on its future earnings/growth/operating expectations). LVS gained so much so quickly, because the risk of bankruptcy was viewed as being so severe it had drastically depressed the market cap of the company.
I'm thinking completely theoretically, so if the world doesn't work like finance theory, fine. But I just can't see any way in which leverage, debt, cash, etc don't substantially alter the market cap of a company.
Not necessarily. If shareholders believe the company with the less cash has a better future, that is if future earnings/growth expectations are higher for the company with less cash, then said company may be granted a dramatically higher market cap.
Two companies with identical balance sheets, identical growth rates, and identical net income numbers, can have radically different market caps. It depends on how shareholders regard the companies, what they think their futures look like (and sometimes it even depends just on more ridiculous things like hype / herd insanity, as eg with the dotcom bubble, in which Cisco was given an extraordinary multiple off its earnings).
Walmart's balance sheet & profit picture were far superior to Amazon's at the time when Amazon became larger than Walmart in terms of market cap. Shareholders came to believe that Amazon had a far brighter future, in regards to growth etc etc. Amazon has been granted an unusual valuation for a very long time, on the basis of expectations of future growth.
Would you rather have a $1 in cash and a $9 share in the first company, or a $10 share in the second company where $1 is the cash per share? The second case is more risky so you wouldn't pay the full extra $1 for the second share.
Of course it could also be the case that the spread is larger than $1, if the first company is too short on cash and there is a liquidity risk depressing the valuation.
Not if they're otherwise identical companies, it isn't. There may be reasons to expect a correlation between risk and cash holdings, or something to that effect, but ultimately a share in a company is a share of ownership of that company's assets. If a company didn't become $10B more valuable when given $10B in cash, where exactly did that value disappear to? Value doesn't vanish into thin air simply because it's now owned by a company.
The "best" capital structure for GM has been widely discussed recently, see for example: https://www.bloomberg.com/view/articles/2017-03-28/hedge-fun...
IE, imagine if they double the amount of stock.
Each stock is now half of the equity that is was before, so price would be cut in half.
Elon musk created a narrative that is building a completely different way of manufacturing and commercializing cars that differs greatly from historical car manufactures.
If you accept that, current economic models that are used to value other car manufactures can't be used to value Tesla.
Of course, that doesn't tell you anything long-long-term. Every ad and product used to have AOL keywords somewhere. Tesla may obliterate the auto industry, but what forms from the ruins may not have a place for them.
What is a go-to place for finding data for such analysis? I would like to learn this :)
Think about buying a $1M rental property. One guy gets 9 friends together and they each put up $100k for 10% of the house. The house/business is worth $1m. The market cap is $1m.
Another guy wants to buy a $1m rental property but he goes to the bank and gets a $900k mortgage. The house is worth $1m but the market cap is only $100k.
Since tesla and GM raised money very differently their market caps are not comparable.
GM and Tesla are both public market stocks. Regardless of how they raised previous capital, the market is valuing Tesla higher.
That's because houses are quoted in total, not just the equity piece. Stocks are only the equity. (They could quote just the equity piece of houses. In that case it would be unhelpful to compare prices without checking the debt.)
We'll know in a few months if Tesla will be a success. For their Model 3, Tesla has to transition from being a high-margin low-volume manufacturer to a low-margin high-volume manufacturer. That's very tough. Few companies succeed at that.
Already, the price of the Model 3 has crept up. The base vehicle is supposed to sell for $35K, but in practice most models will be around $45K with upgrades. Maybe higher. Overpriced upgrades are where the profit comes from in automotive. That may be how Tesla escapes fighting it out on cost with Chevy and Toyota.
Really almost a content-free piece with respect to the headline.
Historically, betting on immense multiples of revenue and earnings on negative cash flow companies has not worked out on average, but Tesla may not be average.
Regardless, I wouldnt invest in either company. Autos have historically been a terrible investment due to large capital requirements, low margins, a cyclical operating cycle, ugly pension requirements, and fairly expensive labor... We shall see what the future brings.
Makes me wonder... the method of product selection and delivery have changed from in store browsing and carry out, to online browsing and delivery. Instead of sales personnel and cashiers, it involves warehousing (to a larger degree) and delivery vehicles. Employment in sales/cashiers therefore would drop, while employment in warehouses and delivery companies would have increased.
What are the relative ratios? For every x retail jobs lost, how many y 'logistics' jobs are created? Once automatic warehouses and autonomous vehicles are pervasive, is it a 100% loss?
Also, when considering retail, the shipments from warehouse to store are in bulk, whereas shipments direct to consumer are small numbers of discrete items, which requires more handling for picking, packing and shipping.
It ends up being more productive to look at much broader economic data, but that allows you less ability to drill into the specifics because you are looking at a much larger population, and have less ability to derive why something occurred.
2nd order effects are harder.
The simplest explanation is that antitrust enforcement started to lag in the '80s and became seriously deficient after 2000. Electricity, oil, telephony also had network effects.
https://www.theatlantic.com/magazine/archive/1999/09/dow-36-...
https://hbr.org/1999/11/the-new-economy-is-stronger-than-you...
A few months after these articles were published, the stock market crashed... and it took the better part of two decades to recover.
Would Amazon's ripple effect be pretty big too? All the products it sells have manufacturers (who have employees). Or is it better described by disintermediation, where a product that is sold via Amazon now would have been sold via brick & mortar before?
To some extent, Amazon presumably creates new sales (and hence new jobs in production) but this is almost certainly offset by the jobs it destroys (middlemen of various kinds).
AWS might have greater ripple effects (enabling new tech companies) but they themselves aren't large employers.
China will soon provide battery capacity for cars in excess of what Tesla is producing. Autonomous driving on a broad basis requires a regulatory framework and that may well take time to emerge until there are other brands. The horizontal structure of the conventional car industry makes it likely that alternatives to Teslas autonomous drive will quickly spread across the traditional car companies.
Tesla may well build the best electric car for a long while but volume upside may be limited.
Market cap is "price of one share" multiplied by the total number of shares outstanding.
If you want to buy a small number of shares, you can probably just multiply to find the total price you would pay.
If you want to buy a large number of shares, or the whole company, you can't just multiply. You would need to get the current owners to sell to you, and they might either charge you a premium or refuse to sell. The total worth of a company depends on the distribution and type of ownership (among many other things).
Market cap is a fine shorthand, but serious analysis about comparing worth should control for several other things.
2) Because GM (and Ford and Chrysler) has a lot more unknowns and risks given its increasingly outdated dealer-based sales channel, along with decades of pension liabilities, and is ultimately in a precarious situation, see: the near collapse of the US auto industry in 2008.
3) Maybe most importantly, investors believe that ultimately Tesla will be purchased by a big tech company with money to burn (or by a traditional automaker in full panic mode). Apple could pay _cash_ for all of Tesla's outstanding stock and still have the biggest cash stockpile of any corporation in the world.
Apple doesn't even want to be in the business of manufacturing iPhones - they outsource it to Foxconn. So why would they suddenly be interested in owning Tesla's huge car and battery manufacturing factories that employ thousands of workers?
My reason for giving Tesla a higher valuation is different to the next guy. However, Tesla is a better starting point for capitalising on a low carbon future. Even the GM pension obligations factor into my hunch. Ultimately it is all about belief, in my case a belief in a zero carbon future.
This is a really weird phrase. "Concentrated among consumers"? More than 80% of Americans use the internet, not exactly "concentrated".