I am not so sure about this. Apple has been able to constantly raise the price of its products over the last ten years, and nobody gave a sh*t. Tesla has not been able to post a single year of positive earnings, but this could have been avoided if they raised the price of their car by let’s say 5k USD. The fact that they did not show a lack of pricing power.
I think this comes mainly from the fact that outside of Switzerland and USA, the price of a Tesla in most countries is more than one year of salary. People in EU are willing to sacrifice a month of salary to show social status with their Iphone (sigh), but certainly not one whole year. So far this limits a lot Tesla’s addressable market.
Thus Tesla is in the uncomfortable place where the mass market dreams about having a Tesla but cannot afford it, while the car luxury market presents already a lot of competitors and Tesla cannot raise their prices as they wish.
As long as Tesla builds and sells cars and not only software, they have the cost structure and capital expenditures of an automaker. This means huge expenses in factories/tools/assembly lines and so on. Tech companies don’t have this issue. This makes them way more shareholder friendly, because they don’t need to re-invest their earnings into assets that depreciate quickly. Therefore a bigger part of the earnings accrue to the shareholders.
Let’s have a thought experiment, and try to figure out what a 1 trillion USD market cap would mean for Tesla:
- At this market cap, it is likely that the expected long term growth rate will be much lower than it currently is. Let’s be optimistic however, and say that TSLA will still command a P/E of around 20, which still means the market expects an healthy growth.
- That would mean that TSLA would roughly earn USD 50 billion per year.
- The current good players in the auto industry have net margins of 4-5%, which means that TSLA would need to sell at least 1,250 trillion USD per year worth of cars.
- With a unit price between 40k and 80k USD (let’s cut it in the middle at 60k USD), that means TSLA would need to sell 21 million cars per year (and growing). As a comparison, the current absolute giant of the auto industry (Volkswagen Group) sold 10 million cars in 2019.
- But VW sells 10 million cars per year in the mass market, and as I said above, this mass market is currently inaccessible to TSLA because most people are too poor to buy their car. Achieving to sell so many cars would mean that TSLA managed to design a car that is way cheaper, without altering their prestige image. As the biggest cost of an EV is its battery, that would likely mean a new technology of batteries that is twice cheaper as the current one…
- What about the capital and the assets needed to sell these cars? Tesla would need to invest in factories/plants/machinery/tools that need to be maintained/replaced every N years. let’s try to ballpark those numbers.
- We suppose Tesla has finally a viable business model and earns its cost of capital, which is a huge feat for a car maker (otherwise, a P/E of 20 does not make sense). So let’s say TSLA’s ROE is 10%. That means that they have around 500 billion Equity. Their current capital structure is 26 billion of assets vs 6 billion of equity. if this ratio stays the same, we would have to expect total assets to be worth around 2 trillion USD. Ok, some of it would be acquired via debt (being lent a trillion dollar will be a huge feat as well, but let’s assume it is possible), but the rest needs to be financed by retained earnings.
- That means that in order to be able to make 50 billion earnings per year, Tesla will need to reinvest around one trillion dollar of its historical earnings into depreciating assets. This is likely to be money that the shareholders will never see in their pocket…
- however, TSLA was still losing a billion dollar per year in 2019. Hard to invest in assets when you cannot reinvest earnings to begin with…
Feel free to correct if you think some parameters of this thought experiment are unrealistic. The goal was just to have an idea of what 1 trillion USD would mean as a market cap.
As you see, although it is not absolutely impossible, but still very difficult to achieve within 10 years. So many things need to go right at the same time that I’ll gladly take a pass on this one.
On the other hand, many things can happen. They could change their business model (but it needs to be proven right). They could finance their factory with taxpayer money (as they did already with some of their plants), and so on. But so far this is only speculation.