How Tesla Made It to the Winner's Circle
February 19 2021 - 7:30AM
Dow Jones News
By Sebastian Pellejero and Rebecca Elliott | Graphics by Peter Santilli
Tesla Inc.'s stock-market tear has made it one of the most
valuable U.S. companies. But in some key ways, the electric-car
maker is very different from other companies its size.
Tesla's shares have soared more than 300% in the last year,
lifting the company's market capitalization above $800 billion
before retreating. The company's valuation as of Thursday was
larger than the next seven largest auto makers combined, placing
the company shoulder-to-shoulder with market giants: Apple Inc.,
Microsoft Corp., Amazon.com Inc., Google parent Alphabet Inc. and
Facebook Inc.
Here's a look at how Tesla got here, and how its arc compares to
other companies in the S&P 500:
It became extremely valuable, fast
At 244 days, the time it took Tesla's market value to grow from
$100 billion to $800 billion significantly outpaced its peers. The
17-year old company has benefited greatly from investors embracing
Chief Executive Officer Elon Musk's vision of electric vehicles and
his notion that Tesla isn't just a car maker, but a technology
company. Optimism about a transition to electric vehicles has
fueled record gains in shares of EV and battery makers over the
past year.
Actions by the Federal Reserve have helped push more investors
into stocks and major indexes. The central bank cut interest rates
and bought billions of dollars of bonds, sending long-term Treasury
yields near zero while yields on other fixed-income securities
recovered to pre-pandemic levels. With such low yields offered from
bonds, investors tend to turn to riskier assets such as stocks.
Tesla capitalized on ravenous investor appetite for its shares
by selling billions in new stock last year.
Investors became incredibly optimistic
A favorite Wall Street valuation metric -- the forward
price-to-earnings ratio -- measures how much investors are paying
for a share of a company compared with its expected earnings.
Investor optimism about the prospects of many big technology
stocks including Amazon, Apple and Tesla has helped lift their
forward price-to-earnings ratios. A high so-called P/E ratio
signals that shareholders expect the company to post strong
earnings growth beyond the company's forecast period, generally a
year.
Tesla's shares trade at a price equal to more than 184-times
forecasted earnings over the next 12 months, according to FactSet.
That's higher than the average forward P/E ratio for the S&P
500 as of Wednesday's close of around 22-times forecasted
earnings.
Mr. Musk last year said he thought the company's share price was
too high. More recently, however, Mr. Musk rationalized the
valuation based on the company's efforts to develop self-driving
technology, which he said would make vehicles more useful and boost
revenue.
"I think there is a way to sort of like justify the valuation of
the company where it is," he said during the company's
fourth-quarter earnings call in January.
It started making money -- but not like other giants
Tesla for years lost money as the company invested in developing
new vehicle models and production capacity. It turned a corner in
2020, when it ended the year with a $721 million profit, its first
year in the black. While a significant milestone for the company,
that profit pales in comparison to the tens of billions of dollars
in net income that companies such as Alphabet, Microsoft and Apple
earned in recent years.
Tesla has benefited from the sale of regulatory credits to rival
auto makers that need to comply with emission-related rules. Such
sales brought in around $1.6 billion last year, up from $594
million in 2019. Tesla Chief Financial Officer Zach Kirkhorn said
during the latest earnings call that regulatory credit sales
wouldn't be a material part of the company's business
long-term.
Now it plans to get bigger
Much of Tesla's future performance will depend on the company's
ability to scale up. The company handed over nearly half a million
vehicles to customers globally last year, and plans to increase
vehicle deliveries by about 50% annually, on average, in coming
years.
Even with those increases, Tesla for years would be producing
far fewer cars than the world's auto giants churn out. German auto
maker Volkswagen AG, by comparison, delivered roughly 9.3 million
vehicles in 2020, and incumbent auto makers are pouring billions
into their own plug-in models. General Motors Co. said in January
that it aims to phase out gasoline- and diesel-powered vehicles by
2035.
Demand for electric vehicles is also helping boost shares of
startup competitors such as NIO Inc., among others. A surge in the
value of NIO's New York-listed shares of around 1,330% over the
past year has made the company the world's sixth most valuable auto
maker. Last year, the company delivered 43,728 vehicles.
(END) Dow Jones Newswires
February 19, 2021 08:15 ET (13:15 GMT)
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