Tesla (NASDAQ: TSLA) and Apple (NASDAQ: AAPL) are two of the most iconic high-tech American brands with many similarities. Both companies are known to think differently, challenging the status quo. Much like Apple controls its iOS operating system and the design of its device hardware, Tesla also designs and makes the body as well as the software that runs its vehicles. However, the investment thesis for each of the stocks is a bit different. While Apple is now a mature company, with several established product lines, Tesla is a high-growth disruptor. Accordingly, Tesla trades at about 18.5x trailing revenue, while Apple trades at a more reasonable 7x trailing revenue. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking more closely at historical revenue growth as well as operating margin growth and financial risk. Our dashboard Tesla vs Apple: Which High Profile Megacap Should You Pick? has more details on this. Parts of the analysis are summarized below.
1. Tesla’s Growth Has Been Much Stronger
Tesla, with revenue of $42 billion over the last 12 months, is a baby about an eighth of Apple’s size. Apple’s revenues over the last 12 months were $347 billion. However, Tesla’s growth has been much stronger. Revenues grew by about 98% over the most recent quarter. While this was driven in part by a favorable comparison with Q2 2020, when the Covid-19 related lockdowns slowed down production and deliveries, the company, Tesla is also benefiting from the scale-up of sales of new models and higher production at its facility in Shanghai. In comparison, Apple’s sales rose by 36%, driven by stronger demand for computing products, digital services, and wearables. Looking at a longer time frame, Tesla’s revenues have risen at a compounded rate of about 39% over the last three years. On the other hand, Apple has grown revenue at a compounded rate of 6% over the last three years.
Looking ahead, Tesla revenues are estimated to grow 55% y-o-y in fiscal 2021, to about $49 billion, per our estimates, while growing to over $65 billion in 2022. On the other side, Apple revenues are projected to rise by about 31% to about $360 billion in FY’21 and to about $381 billion in FY’22.
2. Apple’s Margins Are Much Thicker, But Tesla’s Margins Are Improving Quickly
Apple has among the highest margins in the consumer electronics industry due to its premium products and strong pricing power, with operating margins of about 29% and gross margins of about 41% for the trailing twelve months. Tesla, too, is among the most profitable companies in the auto industry on a gross margins basis. Its automotive gross margins stood at almost 26% over the most recent quarter, excluding regulatory credit sales, compared to margins of under 10% for the broader auto and truck space. However, Tesla’s operating margins remain well below Apple’s, coming in at about 8% over the trailing twelve-month period.
That said, Tesla’s operating margin increase in recent years is notable, with operating margins rising from around -14% in 2017 to about 8% over the last 12 months. Apple’s margin has also improved a little bit recently, versus historical levels, driven by a higher mix of services revenue and a more favorable product mix. Looking forward, although we expect Tesla’s margins to remain below Apple’s in the long run, we expect them to rise more meaningfully, as the company scales up deliveries and increases its high-margin self-driving software sales.
We don’t see either company facing meaningful financial risk. Apple’s cash to assets ratio stands at about 58% and its debt-to-market cap ratio declined to about 5% currently, driven by its rising valuation. Tesla, too, has cut its financial risk considerably through the pandemic, as it doubled down on share issuances to capitalize on its rising stock price. Tesla’s cash to assets ratio stands at about 29%, while its debt to market cap ratio stands at just about 1%.
The Net of It All
The Apple story is simple. Customers buy an iDevice, get hooked to Apple’s device and services ecosystem, and keep coming back to the company for more, powering its cash machine. While Apple stock has become more expensive lately on a relative basis, the company business model promises durable (albeit a bit volatile) growth and steady returns for investors in the form of buybacks and dividends.
The Tesla investment thesis, on the other hand, is a little more complicated. Tesla stands to benefit from the so-called “green wave” as governments looking to decarbonize their transportation industries, set aggressive targets for the transition to EVs. While Tesla is selling more vehicles and doing so much more efficiently, the competition is also likely to mount with mainstream automakers investing considerably into their electrification plans. Tesla’s valuation is also quite rich for an auto stock, with its $770 billion market cap standing at almost 3x that of Toyota, the world’s largest car company. That said, the stock still makes sense at current valuations of about 18x revenues, if you believe that the company’s massive self-driving leadership, and its early mover advantage in the EV space will make the company the dominant player in the future of transportation.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.