Tesla is up 8% on the news that the stock will be included in the S&P 500. This means S&P 500 index funds will be forced to buy Tesla stock (regardless of price) in order to align the funds with the S&P 500 index they’re tracking.
This puts Tesla’s market cap at $420 billion making it the most valuable automaker in the world, or more than double the value of Toyota. Toyota sells almost 11 millions cars per year while Tesla has sold about 430,000 vehicles the last four quarters.
But let’s look at it another way. The 10 most valuable automakers in the world have a combined market cap of $1 trillion. At $420 billion, Tesla is over 40% of the total! However, Tesla’s revenues and earnings each are just about 2% of the total.
The top 10 automakers sell about 54,000,000 million cars worldwide combined. Tesla sells less than 1% of the total even though its stock is about 40% of the total.
Tesla’s price/sales ratio is about 16.5 while the average for the other 9 automakers is about 0.6. Auto manufacturing is a low margin, low growth, competitive, difficult industry so mature automakers tend to have low valuation ratios.
So, what does it mean? It means that Tesla is more than fully valued. Even IF Tesla manages to meet the massive growth expectations, it’s stock is already fully reflecting that.
Even if Tesla grows significantly into its valuation (highly unlikely), at that point it will be a mature automaker with low growth, low margins from that point in time. In other words, lofty growth expectations cannot be expected indefinitely. At a certain point those growth rates will level off.
The bottom line is there is very little upside left from a fundamental perspective but tremendous downside. This automaker is likely overvalued even at one-fourth it’s current level let alone is it deserving of a $400 billion+ market cap. This is not to say there cannot be more irrational exuberance / mania / euphoria on the part of investors in the short-term, but long-term any owners of the stock here are going to look back and say “what the hell were we thinking?”