Tesla’s Valuation Doesn’t Add Up Today, Never Mind $4.4 Trillion Tomorrow

Tesla TSLA 0.84%

had a good third quarter, but this is a stock for which nothing short of spectacular will do. Case in point: Chief Executive Elon Musk’s new stretch valuation target is “Apple and Saudi Aramco combined” — about $4.4 trillion.

After Bell Wednesday, the electric vehicle pioneer reported operating income of $3.7 billion on sales of $21.5 billion. While both were new records, both also fell short of consensus estimates, which had already been cut following a disappointing quarterly sales report earlier in the month. Shares fell in after-hours trading.

Tesla TSLA 0.84%

prepares for fall. The company struggled in the second quarter due to Covid-related shutdowns in Shanghai but insisted it might still be able to meet its target of a 50% sales increase this year. That raised expectations for the second half. After just a solid third quarter, all the pressure is now on the fourth quarter, which Musk says could be “epic” on a call to analysts.

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Much of today’s investor debate surrounding Tesla focuses on whether demand for its expensive electric vehicles will slack as a recession looms. The company blamed logistics issues for weak deliveries in the third quarter, with more vehicles in transit than usual, but some fear Tesla’s customer waitlists are shrinking amid weaker consumer confidence.

While that question is shaping current sentiment, longer-term investors might have other concerns. The company has proven that it can build desirable cars. That can’t explain why it should be worth 14 times as much as General Motors or Ford,

let alone $4.4 trillion. But Mr Musk said Wednesday it was the first time he was seeing “a potential path” to that type of valuation for Tesla.

Comparing Tesla as a cyclical vehicle maker, the target cap on its valuation today could be the $184 billion achieved by Toyota,

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that guided the industry through its last major transformation with principles like lean manufacturing and continuous improvement and still makes the most cars. Assuming that Tesla will capture a higher share of the auto market than the current leader seems crazy, as new competitors are pouring into the industry from all sides.

Also, making electric vehicles is probably no more profitable in the long run than making Toyotas. Mr. Musk makes a lot of Tesla’s “industry-leading” operating margins — 17.2% in the third quarter — but there’s almost certainly a trade-off with his aspirations to build scale. Such numbers are achievable while remaining a relatively niche luxury player, especially in times of vehicle shortages, but Tesla wants to go mainstream.

So the only explanation for Tesla’s valuation is that it’s not about car manufacturing, but that just raises more troubling questions. The company’s stationary storage business had a very strong third quarter, but it remains small. Everything still seems to depend on its artificial intelligence projects, even if the company’s second AI Day last month didn’t suggest that Tesla has significantly differentiated technology. Mr Musk on Wednesday reiterated his usual confidence that Teslas would soon be driverless – claims investors have heard many times before.

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None of this may matter in the near term as investors worry about demand and Mr Musk’s expensive purchase of Twitter: he will be free to sell Tesla shares again after the third-quarter report. However, those who view the company as a buy-and-hold investment still don’t have a good answer to the most fundamental question: What is its valuation?

The recent Senate climate change bill could reduce the sticker price of electric vehicles by thousands of dollars, but it’s also redefining which cars are eligible. WSJ’s George Downs explains the new rules and what they mean for the EV industry. Figure: George Downs

Write to Stephen Wilmot at [email protected]

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