NEW YORK, Oct 19 (Reuters Breakingviews) – Shares of electric-vehicle leader Tesla (TSLA.O), after sliding 45% this year, look reasonably priced — if promises of iPhone-like industry dominance come true. A wrinkle in this quarter’s results, though, points to potentially flagging demand. Returning cash to shareholders only works if the Austin, Texas-based company’s Apple-sized (AAPL.O) dreams become reality.
On Wednesday, Tesla reported third-quarter revenue of over $21 billion, up 56% year-over-year. Even after hiking prices, it delivered 42% more cars to customers. Boss Elon Musk says the carmaker can grow that number at the rate of 50% annually until hitting 20 million in 2030. After last quarter’s supply-chain-driven slowdown threatened progress, it is almost back on track.
Tesla’s 17% operating margin beats the gas-guzzler businesses of rivals Ford Motor (F.N) and General Motors (GM.N) — whose EVs are less profitable still. As a result, its cars resemble Apple’s iPhone. Per Counterpoint Research, the Cupertino-based company accounts for an overwhelming majority of smartphone industry profits; Tesla can make the same claim for the EV industry.
The market seems to be trusting that, like Apple, Tesla can beat its doubters, maintain profitability, and at least come close to its 2030 goal. Assume it does so, and that revenue per car comes in at around $45,000 while operating margins at its core operations hold at 15%. Put the resulting operating income on Ford’s multiple, discount it back at a rate of 10%, and the company’s shares should be worth $249, just above Wednesday’s closing price of $222.
In that sense, Tesla’s $700 billion valuation is reasonable. But there are wrinkles. The company delivered 6% fewer cars than it made this quarter, the widest gap ever in absolute terms, which it blames on shipping woes. The worry is the gap instead indicates flagging demand growth.
Apple faced a similarly tense moment of shrinking profits and growth in 2013. Investors like David Einhorn and Carl Icahn demanded it use its cash pile to buy back sagging shares, and that bet paid off. With its stock price declining, it would make sense for Tesla to feel the same pressures to pull that lever now.
But Apple started 2013 with $137 billion in cash and marketable securities; Tesla has $21 billion. It also has significant cash demands. Capital expenditures this year should equal about 34% of that pile, versus 6% at Apple.
Musk has shown that he deserves the benefit of the doubt when it comes to manufacturing cars. When it comes to paying dividends, though, tossing back cash to shareholders is a risk.
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CONTEXT NEWS
Electric-vehicle manufacturer Tesla said that it made over $21.4 billion in revenue for the third quarter of 2022, up 56% from last year but slightly below analyst expectations of $21.9 billion.
Tesla delivered 343,830 cars in the quarter, up 42% year-over-year but 6% below the number of cars it manufactured.
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Editing by Lauren Silva Laughlin and Sharon Lam
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