In mid-2015, I commented on the apparent anomaly of a financing round for Uber that had an implied market value of equity (MVE) in excess of that of FedEx (FDX). At the time, Uber’s implied MVE was $51 billion, and that of FedEx was $48 billion. My post addressed some of the issues that I saw at the time. Read it here.
Last week, I read an article in the Wall Street Journal titled “Tesla, on a Hot Streak, Passes Ford in Investor Value” (subscription required). That caught my attention, because Tesla is young and quite small and Ford is 100 years old and quite large.
Tesla Model S
Would you rather drive this:
It is beautiful, powered by electricity, sleek, fast and stylish. It is also expensive (from $68,000).
Ford F-150 (and others)
Now this one is big, rugged, some think stylish, “Ford Tough,” powerful, and a gas user (18 city, 24 highway [unloaded]). This one can be relatively inexpensive (from $27,110 for the XL) or considerably more expensive if loaded (from $49,265 for the Raptor).
Of course, Ford has a wide range of vehicles from which to select your ride:
But the Article Was About Valuation
Let me make this disclaimer. I drive neither a Tesla nor a Ford. And I own neither stock, at least directly. So what did the article have to say? The following table will allow us to look at Tesla (TSLA) in comparison with both Ford (F) and General Motors (GM).
To start, look at the second column. Tesla has a current MVE of $49.6 billion compared with Ford’s MVE of $45.3 billion. That was the lead revelation of the article quoted above.
Now, look at the first column. Ford had 2016 sales of $152 billion compared with Tesla’s sales of $7 billion. That’s a big difference!
In the units sold column, we see that in 2016, General Motors sold 10.0 million units, Ford sold 6.6 million units, and Tesla sold a whopping 76 thousand units.
How is the market valuing these companies based on units sold? General Motors is valued at $5.1 thousand per unit sold while Ford is valued at $6.9 thousand per car. And Tesla? The market is valuing Tesla at $653 thousand per car sold in 2016. That’s a lot of future growth packed into today’s price.
Well, the WSJ says that Tesla might sell 500 thousand units in 2017. That values the TSLA at $99 thousand per unit that might be sold. This questioning is not mine, but that of “some of his biggest supporters” per the WSJ.
What’s the TSLA Valuation All About?
The WSJ article states the following:
A Tesla spokesman declined comment on the new market value. In a tweet Monday, Mr. Musk defended against critics of hit company’s valuation, saying it reflects Tesla’s future potential. ‘Tesla is absurdly overvalued if based on the past, but that’s irrelevant,’ Mr. Musk wrote. ‘A stock price represents risk-adjusted future cash flows.’
Tesla has yet to make money, and lost $0.75 billion in 2016. Based on what we can see today, there is a lot of risk and an enormous amount of future cash flows that are discounted into TSLA’s price today.
There is a great deal of what I can only call hope that must be supporting TSLA’s stratospheric valuation.
Would You Rather Own TSLA or F?
We began this post by asking which car you would rather drive, a Tesla or a Ford? After looking at the discussion above, letting go of emotion at the newness and beauty of the TSLA offering, let’s ask another question: Which stock would you rather own, TSLA or Ford?
I’m not advocating either stock; however, as a valuation guy, it is reasonable to ask questions about public company valuations. So I’m asking the questions.
And What About Uber and FedEx?
As I mentioned at the start, Uber’s market cap of equity exceeded that of FedEx based on a round of financing at mid-year 2015. That was the topic of my post then, when Uber was valued at $51 billion and FedEx was valued at $48 billion.
Uber had a large round of financing in mid-2016 that valued it at $66 billion. However, one analyst questioned that valuation. Professor Aswath Damodoran suggested that a more realistic valuation at that time might have been south of $30 billion, raising issues of the conversion from disruption to sustained profitability that might plague Uber in the future.
Others are concerned about the valuation and direction of Uber:
- With a $70 Billion Valuation on the Line, Why Won’t Uber Stop Punching Itself? (January 19, 2017)
- Uber Reels as Dozens of Employees Describe a Sexist, Hostile Workplace (February 23, 2017)
- Uber President Resigns, Adding on to a String of Departures (March 20, 2017)
- Uber Said to Use “Sophisticated” Software to Defraud Drivers, Passengers (April 6, 2017)
Oh, and by the way, FedEx is currently valued at $52.5 billion by the public stock markets.
We know what the market prices of Ford, GM and Tesla (and FedEx) are every day. We don’t always know why the market prices these companies the way it does.
Jeff Davis, Managing Director at Mercer Capital, writes a column for the SNL Blog (S&P Global Financial). He recently wrote an article that sheds some light on the current valuation of General Motors.
When one moves beyond high level observations, the water can get murky. That murkiness is what makes markets.
So what does all of this have to say about the valuation of your privately owned business? Elon Musk was right when he said (above) that “A stock price represents risk-adjusted cash flows.”
So, focus on the valuation triumvirate for your business of expected cash flows, the growth of those cash flows, and the risk, as perceived by potential buyers, of receiving those cash flows in the future. If you want to talk about this valuation triumvirate for your business, please give me a call (901-685-2120) or email (firstname.lastname@example.org).
In the meantime, be well!
My two most recent books are available in an Ownership Transition Bundle. The bundle, priced at $35 plus s/h, has been attractive for many business owners, appraisers and attorneys.