Can Tesla's Rising Market Cap Be Justified?

Tesla recently announced a potential stock split (pending investor approval). The announcement itself led to a rise in stock prices as investors sprint to buy stock on expectations, even though the date or details were not provided by the company. Tesla on Monday, 28th March 2022 reached a market capitalization of US$1.13 trillion and is now worth more than the combined value of the world's 13 largest automakers.

While Tesla has definitely disrupted the market and led to an EV revolution the valuation is something I feel is hard to justify. The company is far from making the kind of revenues incumbents are making now and will not be making such revenues in the next few years, not to mention that a number of brands are now giving direct competition to Tesla in the EV space. The incumbents have been in the industry for decades and possess deep knowledge of the consumers. Tesla on the other hand is collecting user data live from its cars on the road and making good use of it every day.

Let's talk numbers, there is no doubt Tesla is the largest electric car company in the world. But it made only US$ 54 billion in revenue in 2021, half of what BMW made in the same year. At the same time, Tesla has a market capitalization of US$1.13 trillion against BMW's US$ 60 billion, more than 19x. Similar stats appear when compared with other car manufacturers. While on average the market cap vs revenue ratio of the automotive incumbents mentioned in my chart is just under 60%, that of Tesla is an eye-watering 2107%. Just so you know Apple, arguably the world's most admired company has a market cap vs revenue ratio of 1522%. Some might say that I don't understand the future prospect and position that Tesla could potentially gain in the EV, battery, and solar space. But my argument would be that future is not guaranteed, while Tesla is in a good position, the competitors both old and new are catching up fast in terms of technology.

I had a similar concern about Tesla's valuation bubble in 2017 when the market cap vs revenue ratio was just 426% and I was proved wrong. Since then investors have been feasting on Tesla's shares, keeping the value up and above. I have little doubt that Tesla will succeed in the EV space, but I believe the success will not be as big as investors and Tesla expect it to be. I am in no way a Tesla cynic, in fact, I admire the company but reading numbers and writing stories is what I do and I don't see a happy ending in sight for this one.