Jim Chanos, who made money by shorting Enron before its collapse, compared Tesla Inc (NASDAQ:TSLA) to Bayer Motoren Werk (ADR) (OTCMKTS:BMWYY) in 2015. Chanos asked why TSLA stock traded at half the market capitalization of BMW, who sold just about as many electric cars in the United States, and 2 million total cars worldwide. He also noted that BMW planned to electrify its entire fleet by 2025.
Observers might want to reconsider this question given that Tesla has now passed BMW in market capitalization.
In the first quarter of 2017, Tesla delivered 25,418 cars worldwide … while BMW sells nearly that many vehicles per month in just the United States. Admittedly, not all of the vehicles BMW sells are electric vehicles — and many of BMW’s “electric” cars are actually plug-in hybrids.
Still, while Tesla may make really good cars, I think BMW makes a better addition to your portfolio. At least at these prices.
The Problem With Tesla (At the Moment)
TSLA stock is up nearly 75% over the past year, and each car TSLA sold in 2016 accounted for $800,000 in market cap. For BMW, this figure was only $25,000.
And Tesla is operating cash flow-negative, although some think it will be in the black next year.
I think TSLA — and more broadly, electric vehicles and alternative energy — has a future, and I think this is something oil companies should pay attention to.
But I also think buying the stock at these prices requires one to hold unrealistically high expectations about Tesla’s future. I would feel much better investing in a company that produces high-quality cars and has a track record of generating profits, even if that company is a little bit older.
I don’t mean to pick on Tesla. I’ve raised similar concerns over other speculative technology companies with negative cash flow trading at stratospheric valuations, such as Snap Inc (NYSE:SNAP).
But don’t take this as an invitation to short. Tesla’s momentum can continue for quite some time.
Profitability and Valuation of TSLA Stock
The market values a stock by looking at the expected future earnings of the underlying company.
Tesla may never have posted a profit on an annual basis, but this doesn’t mean TSLA stock is worthless. Early-stage companies often operate at a loss the first few years while they scale up and grow revenues. Eventually, they mature, become profitable, and begin returning cash to shareholders, or reinvesting it in the business for growth.
Great stocks, such as Facebook Inc (NASDAQ:FB), combine rapid revenue growth with high profit margins.
The market thinks that Tesla will grow revenue at a white-hot pace in the coming years, eventually becoming profitable. Tesla’s valuation suggests that they expect a great deal of future profits. TSLA trades at 12.44 times book value and 7.43 times sales.
For now, Tesla is unprofitable and burning through cash.
Tesla bulls like to compare it to Apple Inc. (NASDAQ:AAPL), who earned 79% of global smartphone profits last year, but that strikes me as an optimistic assumption. For one thing, Apple earns a much higher gross margin, around 39% in 2016, vs. Tesla’s 22.8%. And Tesla wants to make a mass-market car, the Model 3, which most likely will push margins down further.
And while Tesla might be ahead in electric vehicles, its competitors are making headway. Global automakers are revving up their efforts, offering more choices such as the Chevy Bolt, the North American Car of the Year produced by General Motors Company (NYSE:GM).
BMW’s Profitability and Valuation
BMW, on the other hand, has generated profits for decades and will continue to do so. Also, BMWYY — its over-the-counter-traded stock — is valued very conservatively, limiting potential downside.
Investors don’t think BMW will be the next Apple; in fact, they don’t expect much from BMW at all. According to Morningstar, BMW trades at 0.57 times sales, 7.47 times earnings, 15.36 times cash flow and 1.12 times book value.
This comes at a time when the S&P 500 trades at a price/earnings multiple of 25.75.
BMW stock does not have any overly optimistic assumptions baked into its valuation. BMW doesn’t have to become the next Apple for stockholders to profits; at this valuation, it doesn’t’ really have to do much at all.
Tesla, on the other hand, has to pretty much conquer the market for cars the way Apple conquered the smartphone market. And if it does, the stock probably won’t gain as much because investors already have high expectations.
Bottom Line on BMW
If I had to buy the stock of an automaker, I would go for BMW.
Tesla is a very polarizing stock. You have to love it or hate it; few people look at it and remain undecided or neutral.
The CEO of AutoNation put it best: TSLA is “either one of the great Ponzi schemes of all time or it’s gonna work out.”
If you really can’t decide, you might look into buying Tesla’s convertible bonds. The venture capitalist Chamath Palihapitiya recommended this; in his view, convertible bonds give you most of the upside while providing you downside protection.
If Tesla does well in the years that follow, you can convert your bonds into TSLA shares. If it does poorly, however, you will probably be able to reclaim at least some of your principal. Creditors come before shareholders when companies go belly up, and shareholders are often wiped out.
BMWYY is a much surer bet.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.
