The case for Tesla

Rob Armstrong (0:06)

Pushkin. Tesla reported earnings last week. Things are a bit slow at Elon Musk's company. It's growing in the quite low single digits. Yet it is still worth $700-odd billion.

aiden, why is a slow growing car company worth three quarters of a trillion dollars?

Aiden Reiter (0:28)

Well, maybe it's not a car company.

Rob Armstrong (0:30)

Maybe not. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am Rob Armstrong coming to you from the small and sweaty Unhedged World Headquarters in New York City, joined by aiden Reiter, the newest member of our team.

Aiden Reiter (0:49)

Howdy.

Rob Armstrong (0:50)

Howdy to you, partner. Today on the show, what is Tesla and how much is it worth? So the stock has not been great. It's been sideways for a couple of years. It was down on the earnings report. But the fact is, this is still an enormous company. And what we're trying to figure out here is how come?

Aiden Reiter (1:13)

Yeah. So what we did is we looked at the Wall Street consensus estimate of what Tesla will be worth in the future. And we tried to back it out using the little logic our brains have.

Rob Armstrong (1:23)

Yes. So we're looking five years into the future, so 2029 Tesla's revenue last year was kind of just below $100 billion. What is the street looking for five years hence?

Aiden Reiter (1:34)

The street is looking for somewhere between 240 to 250 billion.

Rob Armstrong (1:37)

OK. And this year Tesla's expected earnings are 250 or something. And what is the street looking for in five years?

Aiden Reiter (1:46)

The current earnings per share is 250 The street is looking for $950 to $10.

Rob Armstrong (1:51)

Right. So we got quadrupling earnings.

Aiden Reiter (1:54)

Yes. And that's earnings that are already 94 times current earnings.

Rob Armstrong (1:57)

Yeah. So it's expensive stock now, but if you get to 10 bucks of earnings, let's say in five years, it's a $230 stock or something, that at least is in the general realm of sanity. Like a $200 stock with $10 in earnings. I know it's in the future and you have to discount and all that, but you're in the realm of sanity there. So what do we have to do to get there?

Aiden Reiter (2:20)

Yeah, to get there, you have to look at Tesla's current balance sheet. And what we did is we tried to divvy up what are their current revenue streams or their future revenue streams and try to back out out of consensus estimates. We should probably caveat that consensus estimates are just based on a couple people.

Rob Armstrong (2:35)

Yeah. It's just a Wall Street number, right? It's 10 analysts filling out their models or whatever, but it gives us a convenient target to shoot for.

Aiden Reiter (2:44)

Yes. And some say, forecasting the future, especially for someone as hard to read as Elon Musk, is fool's errand, but it's also really fun.

Rob Armstrong (2:51)

That's what we're here for. Exactly. Let's start with the car business.

Aiden Reiter (2:54)

So currently, Tesla has two revenue streams. They have their cars and they have their energy business. And then they also have servicing those cars and they have energy business, but we'll just call that a broader servicing cost. So on the cars front, as you said Rob, didn't have a great year so far, not selling as many cars as they were expected to. We assumed in order to get to 250 billion, and again other people can make different assumptions, that they would have $150 billion in revenue in cars.

Rob Armstrong (3:21)

Yes.

Aiden Reiter (3:22)

That would be about 3% of the total car market if you assume the current car market grows by the rate of global GDP growth.

Rob Armstrong (3:28)

Yeah. So they become a significant, they go from being an important but still somewhat niche electric carmaker, to being a kind of global player in cars over the next five years, on the scale of the big car names in five years. Right now, that's not the trajectory. We're assuming a level of growth in the car business over the next, consistent level of growth in the car business over the next five years, they are not currently achieving.

Aiden Reiter (3:56)

Not achieving and it doesn't sound like they really intend on achieving.

Rob Armstrong (3:59)

Right. At least they're not emphasizing it. They're not banging the table on how much the car business is going to grow. There's other stuff they're banging the table on.

Aiden Reiter (4:07)

Yeah. So we're assuming that's $150 billion. Energy.