Rather than argue about whether you should invest in Tesla (NASDAQ:TSLA), it makes more sense to look at the source of its market power. It’s true that TSLA stock seems overvalued for a car company, but is there more to the story?
Tesla’s latest results were called a disappointment, but as the market opened on Feb. 1, half the losses had already been recouped. Shares had fallen from $880 to below $800 but opened at $814.29 each. That’s a market capitalization of $752 billion on GAAP net income of $721 million and total revenue of $31.5 billion.
Why are people happy to pay more than 25 times last year’s revenue for Tesla, while General Motors (NYSE:GM) still sells at a discount, and with four times the net income to boot?
The New Electric System
As I have written before, it’s not about cars. It’s about batteries. It’s also about future electric infrastructure, where cars and trucks become a major component of demand.
Tesla shares shot up fivefold in value last year, as it became clear the company had learned to scale production and was miles ahead in battery technology. New tabless batteries will have more range and be cheaper to produce, according to the company. This will let it get prices on its cars down to $25,000, about the price of a new Toyota Motors (NYSE:TM) Camry.
More important is that Tesla now has over 160,000 charging stations in the U.S. alone. The next largest 480-volt network, which belongs to the Switchback Energy’s (NYSE:SBE) much-hyped Chargepoint, is one-tenth as large. Because of its semi-automated driving (CEO Elon Musk no longer calls his cars self-driving), Tesla can also gauge supply and demand for a growing share of the electric market. Plus, the entire system is proprietary, meaning Tesla can make money from service, from repairs, from electricity and from its computer services.
Then add in SpaceX’s growing constellation of Starlink satellites, with global service starting at $99 per month and the ability to drop that substantially as it scales, along with a CEO “reality distortion field” equal to that of the late Steve Jobs.
The Apple Comparison
Musk likes to talk about how he offered to sell Tesla to Apple (NASDAQ:AAPL) a few years ago but it wouldn’t bite. But it’s Apple that really has analysts buying Tesla stock.
That’s because, under Tim Cook, Apple has maintained its market advantages. Anyone who thought Apple was a one-man band has been dissuaded by Cook’s record. This includes the Apple Watch, Apple Cloud and now the Apple chip, all of which have sent the stock up over 860% since Cook took charge.
Tesla’s advantages in today’s auto market look a lot like Apple’s did 10 years ago. Musk has integrated a full range of services into Tesla vehicles and is now extending it into industrial markets like semi-trucks.
Hedge-fund managers who got into Tesla early, like Cathie Wood’s Ark Investment Management, are the new stars of Wall Street. The fact that Tesla’s solar-power business is anemic, that its semi-trucks can’t get batteries yet or that profits still depend on regulatory credits, start to look like opportunities.
The Bottom Line on TSLA Stock
TSLA stock is highly valued because it’s seen as more than a car company.
As cars increasingly dominate electricity markets, Tesla becomes a utility. As cars become computerized, Tesla captures all kinds of service revenue. As they need telecommunications, SpaceX makes Tesla an internet company.
It’s not just today’s results that power Tesla stock. It’s the expectation that Tesla can dominate the huge markets its electric cars produce. And it’s also the fact that its rivals still don’t seem to know what’s going on, let alone have strategies to completely respond.
At the time of publication, Dana Blankenhorn directly owned shares in AAPL.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.
