General Discussion: 2018 Investor Roundtable

[SteveG3]

Out today from Consumer Reports

First Drive: Tesla Model 3

fwiw,

1) this is a quick take, full data driven road test to come,

2) the YouTube version of the video, link below, is filling up with lots of gibberish trying to talk the car and Tesla down in the comments section (i.e., ~Bolt so much better~, ~Scam, $35K version never coming out~,...)

 

[ValueAnalyst]

I’d like to put an end to the nonsense of Tesla being valued similarly to companies that produce several times more units.

Not only the “competition” produces vehicles that live in the past, Tesla’s ENTERPRISE value is a fraction of those of functionally antiqued road transporter (FART) makers.

More than half of the ENTERPRISE VALUE of many traditional FART makers is held bondholders, so market cap alone is not an informative comparison.

Be informed against FUD.

The above post, written in bed at 5 a.m. with eyes half shut and zero caffeine, seemingly confused people, so here's a better-articulated version:

----------

Tesla (TSLA) is often said to be valued as highly as certain traditional automakers, and the metric used for this argument is market capitalization. Let me explain why market capitalization is an imperfect measure.

What Is Market Capitalization?

The market capitalization of a company, or the total market value of its equity, is simply the number of shares outstanding multiplied by the stock price:

Market Capitalization = Shares Outstanding x Stock Price

Tesla currently has 168.9 million shares outstanding, so at the last stock price of $352, Tesla's market capitalization is $59.5 billion. This figure represents the market value of Tesla's equity, or how Mr. Market prices Tesla's equity.

Tesla's market capitalization compares similarly to that of General Motors (GM):

Market capitalization, however, does not tell the whole story.

What Is Enterprise Value?

Enterprise Value (not to be confused with Intrinsic Value) is a more comprehensive measure than market capitalization, and represents the total market value of the business, or market participants' estimate of the discounted value of future cash flows, some of which go to debt, minority interest, preferred stock holders. Enterprise value is calculated as follows:

Enterprise Value = Market Cap + Debt + Minority Interest + Preferred Stock - Cash

The following is how Tesla's enterprise value compares to that of General Motors:

The above graph illustrates that, even though the market value of Tesla's equity is similar to that of GM, Mr. Market currently prices the total value of GM's business nearly twice as highly as that of Tesla. In fact, Mr. Market currently prices Tesla's enterprise value less than all other global automakers:

Why Is This Important?

Bears argue that Tesla and GM are price similarly (per market capitalization), and they conclude that this is unwarranted as General Motors produces 10 million cars annually, whereas Tesla has produced only 100,000 in 2017.

The above argument ignores several key valuation issues such as differences in enterprise values, which is a more comprehensive measure of valuation than market capitalization, as well as differences in average selling prices, gross profit margins, operating expense trends, but most importantly, the diverging future of the two companies' bread-and-butter business lines: internal combustion engine vehicles versus all-electric vehicles.

The Future Is All-Electric

Tesla's Elon Musk says it, Apple's (AAPL) Tim Cook proclaims it, and General Motors' Mary Barra agrees: the future of transportation is increasingly electric. Where players disagree is how quickly this future will materialize, and depending on that, what role internal combustion engines and hybrids will play during the transition.

Tesla is betting that the future will arrive quicker than others expect, which is why the company produces only all-electric vehicles. In fact, Tesla is now producing more all-electric vehicles than any other player across the industry, and it has the most aggressive plans to expand all-electric vehicle production among all global automakers.

Bottom Line

Enterprise value is a more comprehensive measure of corporate valuation than market capitalization, and Mr. Market still prices Tesla less than all of its traditional competitors, even though it has the highest run-rate production and the most aggressive expansion plans of all-electric vehicle production, which many agree is the future of transportation. This is why I invest in Tesla.

 

[mongo]

The above post, written in bed at 5 a.m. with eyes half shut and zero caffeine, seemingly confused people, so here's a better-articulated version:

----------

Tesla (TSLA) is often said to be valued as highly as certain traditional automakers, and the metric used for this argument is market capitalization. Let me explain why market capitalization is an imperfect measure.

What Is Market Capitalization?

The market capitalization of a company, or the total market value of its equity, is simply the number of shares outstanding multiplied by the stock price:

Market Capitalization = Shares Outstanding x Stock Price

Tesla currently has 168.9 million shares outstanding, so at the last stock price of $352, Tesla's market capitalization is $59.5 billion. This figure represents the market value of Tesla's equity, or how Mr. Market prices Tesla's equity.

Tesla's market capitalization compares similarly to that of General Motors (GM):

Market capitalization, however, does not tell the whole story.

What Is Enterprise Value?

Enterprise Value is a more comprehensive measure than market capitalization, and represents the total market value of the business, or market participants' estimate of the discounted value of future cash flows, some of which go to debt, minority interest, preferred stock holders. Enterprise value is calculated as follows:

Enterprise Value = Market Cap + Debt + Minority Interest + Preferred Stock - Cash

The following is how Tesla's enterprise value compares to that of General Motors:

The above graph illustrates that, even though the market value of Tesla's equity is similar to that of GM, Mr. Market currently prices the total value of GM's business nearly twice as highly as that of Tesla. In fact, Mr. Market currently prices Tesla's enterprise value less than all other global automakers:

Why Is This Important?

Bears argue that Tesla and GM are price similarly (per market capitalization), and they conclude that this is unwarranted as General Motors produces 10 million cars annually, whereas Tesla has produced only 100,000 in 2017.

The above argument ignores several key valuation issues such as differences in enterprise values, which is a more comprehensive measure of valuation than market capitalization, as well as differences in average selling prices, gross profit margins, operating expense trends, but most importantly, the diverging future of the two companies' bread-and-butter business lines: internal combustion engine vehicles versus all-electric vehicles.

The Future Is All-Electric

Tesla's Elon Musk says it, Apple's (AAPL) Tim Cook proclaims it, and General Motors' Mary Barra agrees: the future of transportation is increasingly electric. Where players disagree is how quickly this future will materialize, and depending on that, what role internal combustion engines and hybrids will play during the transition.

Tesla is betting that the future will arrive quicker than others expect, which is why the company produces only all-electric vehicles. In fact, Tesla is now producing more all-electric vehicles than any other player across the industry, and it has the most aggressive plans to expand all-electric vehicle production among all global automakers.

Bottom Line

Enterprise value is a more comprehensive measure of corporate valuation than market capitalization, and Mr. Market still prices Tesla less than all of its traditional competitors, even though it has the highest run-rate production and the most aggressive expansion plans of all-electric vehicle production, which many agree is the future of transportation. This is why I invest in Tesla.

I'm not following (which indicates nothing about anything),
Given investors/ trader care more about market cap (MC) than enterprise value (EV), doesn't this thesis show that Tesla is over valued since its EV is 1/2 GM's and MCs are equal? If Tesla's EV was higher than GM's I'd see this being a basis for investing in TSLA.

 

[ValueAnalyst]

I'm not following (which indicates nothing about anything),
Given investors/ trader care more about market cap (MC) than enterprise value (EV), doesn't this thesis show that Tesla is over valued since its EV is 1/2 GM's and MCs are equal? If Tesla's EV was higher than GM's I'd see this being a basis for investing in TSLA.

You're confusing Enterprise Value with Intrinsic Value.

Market Capitalization and Enterprise Value are the "price" of the company's equity and the total business (including debt, etc.), respectively. These "prices" are set by the markets and fluctuate as the stock price changes.

Intrinsic Value is the "value" of the business, estimated by each informed investor using various, fundamentals-based valuation methodologies. I use Discounted Cash Flow analysis method, which falls under the Income Approach to corporate valuation.

 

[SteveG3]

You're confusing Intrinsic Value with Enterprise Value.

Market Capitalization and Enterprise Value are the "price" of the company's equity and the total business (including debt, etc.), respectively. These "prices" are set by the markets and fluctuate as the stock price changes.

Intrinsic Value is the "value" of the business, estimated by each informed investor using various, fundamentals-based valuation methodologies. I use Discounted Cash Flow analysis method, which falls under the Income Approach to corporate valuation.

VA, I think you want to edit the original post, because it conflates Enterprise Value and Intrinsic Value, which you just correctly stated in this post are not the same.

 

[mongo]

VA, I think you want to edit the original post, because it conflates Enterprise Value and Intrinsic Value, which you just correctly stated in this post are not the same.

@ValueAnalyst
That could be, it never uses the word "Intrinsic" anywhere.
If you are saying that Tesla is undervalued in another metric, which would justify a higher market cap, I'm jiggy with that.

 

[ValueAnalyst]

@ValueAnalyst
That could be, it never uses the word "Intrinsic" anywhere.
If you are saying that Tesla is undervalued in another metric, which would justify a higher market cap, I'm jiggy with that.

Tesla is the most undervalued large-cap company right now, if not ever, but that was not the point of my post.

The point is, when a bear tells you Tesla is priced as highly as GM when producing a fraction of cars, tell them "Enterprise Value, dude."

 

[SteveG3]

The above post, written in bed at 5 a.m. with eyes half shut and zero caffeine, seemingly confused people, so here's a better-articulated version:

----------

Tesla (TSLA) is often said to be valued as highly as certain traditional automakers, and the metric used for this argument is market capitalization. Let me explain why market capitalization is an imperfect measure.

What Is Market Capitalization?

The market capitalization of a company, or the total market value of its equity, is simply the number of shares outstanding multiplied by the stock price:

Market Capitalization = Shares Outstanding x Stock Price

Tesla currently has 168.9 million shares outstanding, so at the last stock price of $352, Tesla's market capitalization is $59.5 billion. This figure represents the market value of Tesla's equity, or how Mr. Market prices Tesla's equity.

Tesla's market capitalization compares similarly to that of General Motors (GM):

Market capitalization, however, does not tell the whole story.

What Is Enterprise Value?

Enterprise Value (not to be confused with Intrinsic Value) is a more comprehensive measure than market capitalization, and represents the total market value of the business, or market participants' estimate of the discounted value of future cash flows, some of which go to debt, minority interest, preferred stock holders. Enterprise value is calculated as follows:

Enterprise Value = Market Cap + Debt + Minority Interest + Preferred Stock - Cash

The following is how Tesla's enterprise value compares to that of General Motors:

The above graph illustrates that, even though the market value of Tesla's equity is similar to that of GM, Mr. Market currently prices the total value of GM's business nearly twice as highly as that of Tesla. In fact, Mr. Market currently prices Tesla's enterprise value less than all other global automakers:

Why Is This Important?

Bears argue that Tesla and GM are price similarly (per market capitalization), and they conclude that this is unwarranted as General Motors produces 10 million cars annually, whereas Tesla has produced only 100,000 in 2017.

The above argument ignores several key valuation issues such as differences in enterprise values, which is a more comprehensive measure of valuation than market capitalization, as well as differences in average selling prices, gross profit margins, operating expense trends, but most importantly, the diverging future of the two companies' bread-and-butter business lines: internal combustion engine vehicles versus all-electric vehicles.

The Future Is All-Electric

Tesla's Elon Musk says it, Apple's (AAPL) Tim Cook proclaims it, and General Motors' Mary Barra agrees: the future of transportation is increasingly electric. Where players disagree is how quickly this future will materialize, and depending on that, what role internal combustion engines and hybrids will play during the transition.

Tesla is betting that the future will arrive quicker than others expect, which is why the company produces only all-electric vehicles. In fact, Tesla is now producing more all-electric vehicles than any other player across the industry, and it has the most aggressive plans to expand all-electric vehicle production among all global automakers.

Bottom Line

Enterprise value is a more comprehensive measure of corporate valuation than market capitalization, and Mr. Market still prices Tesla less than all of its traditional competitors, even though it has the highest run-rate production and the most aggressive expansion plans of all-electric vehicle production, which many agree is the future of transportation. This is why I invest in Tesla.

This article is a couple of years old, so would be interesting to see updated numbers. That said, it underscores the importance of being clear whether one is looking at automotive debt, or debt from the financing arms of the GMs and Fords of the world. At the time, GM's automotive debt was only about $9 billion, which would dramatically drop that Enterprise Value figure. Again, the article is a couple of years old, but, I'd be quite surprised if their financing arm is not still contributing the overwhelming lion's share of what you tacked on in debt to come to the higher Enterprise Value figure.

Why Ford Motor Company's Debt Is Often Misunderstood

To my view, there's nothing wrong with comparing Tesla's market cap to that of other automakers... it's not high vs. them. Well, it's not high vs. the rest of the automakers if one does not stop half way through the job and exclude growth rate, ASP (average sales price), and margins. DaveT had a good post covering much of this in more detail with a comparison vs. Ford a couple of weeks ago in his "megathread."

 

[SteveG3]

@ValueAnalyst
That could be, it never uses the word "Intrinsic" anywhere.
If you are saying that Tesla is undervalued in another metric, which would justify a higher market cap, I'm jiggy with that.

wish we had a "maybe think this through some more" button rather than just the "disagree," because, rather than disagree with you, I just don't want to see you or the rest of the board go off course with this analysis, and I definitely don't want to see you post on Seeking Alpha something like the longer analysis of this you just did and have it likely legitimately shown to be off the mark by the bear crowd there.

I hit the "disagree" button anyway, because, after the TT007 events, I feel more of a concern that we share our thoughts more clearly and noticeably when we think there's a line of thinking presented here that's off the mark. I could be wrong on my analysis of your analysis (lols), in which case, myself and the board will benefit if you point it out VA.

 

[ValueAnalyst]

This article is a couple of years old, so would be interesting to see updated numbers. That said, it underscores the importance of being clear whether one is looking at automotive debt, or debt from the financing arms of the GMs and Fords of the world. At the time, GM's automotive debt was only about $9 billion, which would dramatically drop that Enterprise Value figure. Again, the article is a couple of years old, but, I'd be quite surprised if their financing arm is not still contributing the overwhelming lion's share of what you tacked on in debt to come to the higher Enterprise Value figure.

Why Ford Motor Company's Debt Is Often Misunderstood

To my view, there's nothing wrong with comparing Tesla's market cap to that of other automakers... it's not high vs. them. Well, it's not high vs. the rest of the automakers if one does not stop half way through the job and exclude growth rate, ASP (average sales price), and margins. DaveT had a good post covering much of this in more detail with a comparison vs. Ford a couple of weeks ago in his "megathread."

FART makers are still subject to substantial risk from the financing debt, because the financing debt is backed by vehicles whose residual values are declining at a rapid rate, not only due to Tesla's disruption, but also because of higher interest rates, high lease return rates, and so on. Therefore, their balance sheets carry much higher leverage and risk than that of Tesla.

 

[mongo]

Tesla is the most undervalued large-cap company right now, if not ever, but that was not the point of my post.

The point is, when a bear tells you Tesla is priced as highly as GM when producing a fraction of cars, tell them "Enterprise Value, dude."

So confused. Your Enterprise Value graph shows Tesla at half of GM, how is that a comeback against Tesla being overpriced?

The above graph illustrates that, even though the market value of Tesla's equity is similar to that of GM, Mr. Market currently prices the total value of GM's business nearly twice as highly as that of Tesla.

Are companies with a lower Enterprise Value better? Is it Value as in a good deal, not value as in how much it is worth/ Valuation?

 

[ValueAnalyst]

wish we had a "maybe think this through some more" button rather than just the "disagree," because, rather than disagree with you, I just don't want to see you or the rest of the board go off course with this analysis, and I definitely don't want to see you post on Seeking Alpha something like the longer analysis of this you just did and have it legitimately shown to be off the mark by the bear crowd there.

I'm not sure what you mean. The article does not discuss or refer to Intrinsic Value, which is an entirely different concept.

My post only discusses the fact that GM and Tesla are not similarly priced, despite the mainstream belief.

 

[mongo]

wish we had a "maybe think this through some more" button rather than just the "disagree," because, rather than disagree with you, I just don't want to see you or the rest of the board go off course with this analysis, and I definitely don't want to see you post on Seeking Alpha something like the longer analysis of this you just did and have it legitimately shown to be off the mark by the bear crowd there.

I hit the "disagree" button anyway, because, after the TT007 events, I feel more of a concern that we share our thoughts more clearly and noticeably when we think there's a line of thinking presented here that's off the mark. I could be wrong on my analysis of your analysis (lols), in which case, myself and the board will benefit if you point it out VA.

I think you meant to reply to @ValueAnalyst , if not don't worry, I'm not posting to SA and I could use the "think more" button.

 

[ValueAnalyst]

So confused. Your Enterprise Value graph shows Tesla at half of GM, how is that a comeback against Tesla being overpriced?

Again, the post isn't about "undervaluation" or "overvaluation." The post is about the "price" of two companies compared on two different pricing measures. The post does not refer to value.

Are companies with a lower Enterprise Value better? Is it Value as in a good deal, not value as in how much it is worth/ Valuation?

Enterprise Value is a measure of "price," not Intrinsic Value, which is an entirely different concept.

 

[Curt Renz]

...To my view, there's nothing wrong with comparing Tesla's market cap to that of other automakers... it's not high vs. them. Well, it's not high vs. the rest of the automakers if one does not stop half way through the job and exclude growth rate, ASP (average sales price), and margins. DaveT had a good post covering much of this in more detail with a comparison vs. Ford a couple of weeks ago in his "megathread."

Indeed, growth potential must be considered in valuations. In addition, when comparing the current market capitalization of Tesla versus the legacy automakers, for the latter we really should include their franchised dealerships, suppliers and a major portion of the oil industry. In that case, Tesla is still valued at nowhere near any of its large competitors.

 

[SteveG3]

I'm not sure what you mean. The article does not discuss or refer to Intrinsic Value, which is an entirely different concept.

My post only discusses the fact that GM and Tesla are not similarly priced, despite the mainstream belief.

The article points out how for these automakers the debt from their lending arms can be massive in comparison to their actual automotive debt. While the debt from their lending operations is something to think about, and can be a risk, looking at Enterprise Value, without a big asterisk enumerating and explaining the difference between automotive debt and lending debt makes a comparison of Enterprise Value with Tesla extremely distorted.

 

[ValueAnalyst]

The article points out how for these automakers the debt from their lending arms can be massive in comparison to their actual automotive debt. While the debt from their lending operations is something to think about, and can be a risk, looking at Enterprise Value, without a big asterisk enumerating and explaining the difference between automotive debt and lending debt makes a comparison of Enterprise Value with Tesla extremely distorted.

Normally yes, but not when the asset backing the financial debt is at the verge of obsolescense.

I stand behind my analysis and post. You are welcome to respond, which you did, but I don't see a point in going back and forth for pages.

 

[SteveG3]

I think you meant to reply to @ValueAnalyst , if not don't worry, I'm not posting to SA and I could use the "think more" button.

yup, lols, that was meant as a reply to VA.

 

[SteveG3]

I looked into the distinction before in this article, which is unfortunately now behind a paywall, but the gist of it is that FART makers are still subject to substantial risk from the financing debt, because the financing debt is backed by vehicles whose residual values are declining at a rapid rate, not only due to Tesla's disruption, but also because of higher interest rates, high lease return rates, and so on. Therefore, their balance sheets carry much higher leverage and risk than that of Tesla.

Yes, Ford and GM, do face substantially greater risk than Tesla in terms of the potential for lower residual values to hurt them given the scale of vehicle financing they do directly vs. what Tesla does directly (and, I think it's fair to say, more risk for ICE residuals to go down than Tesla quality EVs). That said, this is a separate issue than the apples to orange comparison that happens when you look at Enterprise Value for these guys vs. Tesla when debt from the lending arms of these companies so vastly exceeds automotive debt.

 

[GoTslaGo]

Yes, Ford and GM, do face substantially greater risk than Tesla in terms of the potential for lower residual values to hurt them given the scale of vehicle financing they do directly vs. what Tesla does directly (and, I think it's fair to say, more risk for ICE residuals to go down than Tesla quality EVs). That said, this is a separate issue than the apples to orange comparison that happens when you look at Enterprise Value for these guys vs. Tesla when debt from the lending arms of these companies so vastly exceeds automotive debt.

Just to clarify for myself.

You’re referring to “debt from the lending arms”, is the debt that GM/Ford take on by providing lending services to customers.

Whereas “automotive debt” is the debt that GM/Ford take on to finance factories, expansion, dividends, etc...

(One you pay back, one you are getting paid back)