The Astonishing Valuation Disparity: Tesla vs. Other Automakers
In this blog post, we will delve deeper into the reasons behind Tesla's astronomical valuation and how it stacks up against its competitors.
In this blog post, we will delve deeper into the reasons behind Tesla's astronomical valuation and how it stacks up against its competitors.
In the fast-paced world of technology and automotive industries, one company has managed to capture the imagination of investors and consumers alike - Tesla. The mind-blowing valuation of Tesla compared to other automakers has sparked a slew of discussions about the future of the automotive industry and the factors driving this valuation disparity.
The crucial aspect that sets Tesla apart from its competitors is its approach to software and technology development. Unlike traditional automakers, who rely on multiple third-party software suppliers, Tesla has taken a different approach by hiring top-tier software talent internally and developing its software in-house. This allows for seamless integration and greater control over technological advancements, enabling Tesla to stay ahead in software innovations, autonomous driving capabilities, and the realm of connected cars.
Tesla's unique approach involves developing software on its distinctive hardware, similar to how Apple develops the iPhone or Microsoft leverages Intel chips and Dell PCs. This allows Tesla to enhance its cars' software functionality regularly, with updates every few weeks.
The company's pioneering efforts in the self-driving space have been remarkable, with projected sales of close to $1.5 billion in self-driving software within a year. Tesla currently offers its Full Self-Driving Capability as an optional software add-on for its vehicles, priced at $6,000 if selected before delivery.
While other automakers may have higher sales figures than Tesla, the valuation gap between the companies is remarkable.
For instance, Stellantis, a well-established automaker with sales ranging from $151-161 billion. Despite its higher sales, Stellantis has a valuation of only $50 billion, resulting in a sales-to-price multiple of 0.3. In contrast, Tesla, with lower sales, boasts a staggering market capitalization increase of over $500 billion in 2020. This puts Tesla on par with the combined worth of the nine largest car companies globally, despite selling only a fraction of their car volumes.
Tesla's unique approach to technology development and its leadership in the electric vehicle market contribute to its elevated valuation. While Tesla trades at a price-to-earnings (P/E) ratio of 90, Stellantis trades at a meagre P/E ratio of 3. This valuation discrepancy is also evident in comparing Tesla's P/E ratio of 54 for historic earnings and 48 for estimated future earnings, significantly higher than the corresponding multiples of gasoline-powered rivals like GM and Ford, which are 6-7 times lower.
Tesla's outstanding valuation can be attributed to its innovative approach and focus on electric vehicles, setting it apart from traditional automakers.
Tesla's market-leading valuation is a testament to its potential to become the unrivalled leader in electrification, connected cars, and autonomous driving. Their early and unwavering focus on electrification has given them a significant advantage over legacy automakers. Moreover, Tesla's deep-rooted expertise in building software has positioned them as trailblazers in the automotive industry.
According to Loup Ventures’ Gene Munster, Tesla's software advantage over legacy automakers will bring in billions in deferred revenue in the coming years. Tesla is three to five years ahead of competitors when it comes to offering over-the-air software updates, showcasing its technological lead.
Tesla's ability to send out over-the-air system updates is unprecedented, and as cars become more tech-savvy, Tesla remains in the lead. Their success has accelerated the global adoption of electric vehicles.
In the realm of autonomous driving, Tesla has been at the forefront. Its Autopilot system enables automated steering, accelerating, and braking. The company's Full Self-Driving (FSD) technology aims to achieve full autonomy, allowing vehicles to navigate and operate without human intervention.
Tesla's business model, not just its cars, is the key to the company's success. They have "broken the mould" by delivering cutting-edge technology and innovations, such as extending the range of electric vehicles to over 250 miles in one charge, introducing powerful luxury models like the Model S and the Roadster sports car, and designing attractive, efficient, and desirable vehicles. Tesla has also open-sourced its technology to boost the industry, built mega factories for vehicle production, and established cutting-edge electric battery gig factories to supply the mass market. Their innovative leasing policies, novel autopilot systems, new supercharger networks, award-winning safe cars, and prompt response to problems and controversies have solidified their trailblazer status in the automotive industry.
By examining Tesla's astonishing revenue multiple of eleven, it becomes evident that investors are placing a hefty premium on the company's prospects. This overvaluation has, to some extent, led to the underappreciation of other automotive enterprises like Ford, General Motors, and Chrysler. These car companies, often seen as legacy entities, lack experience in software development, which puts them at a distinct disadvantage when competing in the transformative landscape of the automotive industry.
Tesla has achieved a unique position by treating cars like software products and focusing on innovation. Tesla's staggering valuation showcases the immense faith investors have in its disruptive potential and market dominance within the automotive sector. While other automakers may boast higher sales figures, they find themselves undervalued due to their comparative lack of software and technology prowess. To bridge the gap and compete with Tesla's standing, rivals must swiftly overhaul their software stacks and future-proof their offerings.
As the automotive industry continues to evolve, discussions on valuation disparities between Tesla and its competitors will likely persist. Will the gap narrow, or will Tesla maintain its iron grip on the market? Only time will reveal the answer. Meanwhile, this extraordinary valuation discrepancy stands as a captivating reflection of the ongoing technological revolution in the automotive space. Tesla's success can be attributed to its unique approach to technology development and its position as a trailblazer in the electric vehicle market.
