Elon Musk, founder of SpaceX and CEO of Tesla Inc., is coming to the Axel Springer award ceremony in Berlin on December 1, 2020.
Johannessen-Koppitz | Bloomberg | Getty Images
Don’t count Elon Musk among those investors who think Tesla is overvalued, even though its stock is up nearly 700% over the past year and the company has valued 213 times its forecast earnings of 2021, according to FactSet.
In the automaker’s fourth-quarter earnings call on Wednesday, Tesla CEO said there was a “roadmap to the potential justification” of its market cap, which has exceeded $ 800 billion, making it the fifth largest US company. Musk is now the richest person in the world with a net worth of over $ 200 billion.
Musk’s valuation math goes like this: Let’s say the company hits $ 50 billion to $ 60 billion in annual auto sales soon (the company had $ 9.31 billion in auto sales in the fourth quarter and said vehicle shipments are in the future would increase on average 50% per year). As Tesla’s self-driving technology continues to improve, these vehicles will become self-driving robotic axes, allowing usage to go from 12 hours per week to 60 hours per week. Tesla could charge additional fees for this robotic axis, which could allow the company to generate much more revenue per car. Basically, it would be like bringing software economics into the manufacturing-intensive auto business.
Musk also announced that Tesla’s Full Self Driving Package will be available in the first quarter on a subscription basis rather than a one-time add-on for $ 10,000. This allows Tesla to generate recurring revenue to improve self-driving technology.
Even if usage only doubles, a valuation of $ 1 trillion can make sense, according to Musk.
“If you were to make $ 50 billion worth of cars, it would be like an additional $ 50 billion in profit, basically because it’s just software,” Musk said in the opening part of the call. Based on that formula, Musk says multiples of 20 times that profit would result in a market cap of $ 1 trillion – “and the company is still in a high-growth mode.”
Less than nine months ago, Musk had a very different perspective on company valuation. In a tweet on May 1, he said, “Tesla stock price is too high,” a comment that caused shares to drop 10%. Since then, the company’s market capitalization has increased more than 450%.
It’s possible that investors are already assuming that Tesla’s cars will eventually become revenue-generating robot axes. But the company is nowhere near those capabilities, and Musk has a promising history when it comes to technological innovation.
For example, when Tesla began discussing self-driving technology in 2016, Musk said the company would take a hands-free tour of the United States by the end of 2017. The company has not yet completed this mission.
Tesla’s capabilities for full self-driving currently include Smart Summon, which a driver can use to call their Tesla to roll out of a parking lot to their location, and Autopilot Navigate, which can be used to steer the car from a freeway entrance to an exit -Ramp, necessary lane changes on the way.
Despite its name, with the Full Self Driving Package, drivers still have to keep their hands on the steering wheel and always pay attention. A Munich court ruled last year that Tesla had misled consumers about the capabilities of its automated driving systems and banned the company from including “full potential for autonomous driving” and “autopilot included” in its promotional materials.
While Tesla has missed out on many of its own projections for self-driving technology, Musk continues to insist it comes. “I really don’t see any obstacles here,” he told an analyst on the call who asked about the company’s progress.
Tesla stock fell 5.5% in expanded trading on Wednesday after the company reported gains that fell short of analysts’ estimates despite sales being better than expected.
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