Elon Musk has told investors that Tesla, his electric car company, will hit sustainable profitability when it has built an international network of self-driving ‘robotaxis’. Should investors eying the Uber IPO be paying attention?
Tesla is worth more than Ford. Just under $8 billion more by market capitalisation, with Tesla’s standing at $45.4 billion to Ford’s $37.8 billion. Ford’s market capitalisation reflects a P/E ratio 10.69. Tesla’s is a phenomenal 322.58. Ford’s 2018 revenues were $160.4 billion and a $3.7 billion profit. Tesla’s 2018 revenue was $21.461 billion and it posted a $1 billion loss for the year. The company posted small profits in Q4 and Q3, its 3rd and 4th profitable quarters ever and the first time two have been back to back.
So why do markets value Tesla higher than Ford? A valuation that, on current revenues, is over 30 times higher than Ford’s. There’s plenty of debate among investors as to the merits of Tesla’s extreme valuation. And the volume of short positions on the stock, often the most shorted on the market, demonstrate many do not have faith the company will justify its lofty valuation anytime soon.
But the facts demonstrate than on average, the market thinks Tesla is worth a price to earnings ratio of over 322 and Ford just over 10. That’s because, rightly or wrongly, market participants believe that Tesla is well positioned to become a dominant force in a market for cars that in 10 to 20 years from now will be very different. And there is clearly a lot of doubt as to whether Ford will fare well in that supposed future market.
Elon Musk, Tesla’s controversial CEO, yesterday spelled out to investors in the clearest terms to date what that future automobiles market the company is priming itself to make a big splash in will look like. It’s not just a market in which petrol and diesel engine vehicles are replaced by electric alternatives. It’s one in which personal ownership of cars begins to dwindle towards relative insignificance, with mass transport instead being serviced by driverless ‘robotaxis’.
Musk said that he believes Tesla will become ‘extremely cash flow positive’ at the point it has built up a global fleet of robotaxis. He envisions that fleet combining privately-owned Tesla cars rented back when not in use and vehicles Tesla itself retains ownership of. He quoted the current cost of operating a robotaxi as 18 cents a kilometre and set to fall further. That compares to the $2-$3 dollars per kilometre currently charged by ride hailing apps such as Uber and Lyft.
Musk went on to further detail that by Tesla’s calculations, each robotaxi vehicle would generate about $30,000 a year in gross profit for the company and would have batteries that could drive up to 1m miles.
So how does Tesla’s future tie into Uber’s and should interest investors eyeing the shares that are for now planned to start trading freely and investable from May 10th? Uber’s IPO valuation is also huge in comparison to current revenues and the significant losses realised every year to date. The company is even further away from sustainable profitability than Tesla is. The IPO valuation doesn’t realistically look like it could ever really be justified by its current core business of its, albeit international market-leading, ride-hailing app.
Like Tesla, Uber will only generate the kind of revenues and profits that would justify its current valuation if it takes a big slice of the future robotaxi market. Tesla’s ‘in’ to that market is the 400,000 cars it has on the road sending it back the data that will boost its hopes in the race towards regulator-approved self-driving vehicles.
Uber’s ‘in’ is having its ride-hailing app on millions of smart phones around the world. As soon as robotaxis are approved by regulators, it is inevitable that its ‘gig economy’ drivers will be phased out for driverless vehicles.
Two different routes to the same future market that investors are relying on to provide them with future returns. If it doesn’t neither company will have a bright future. And if it does both could go on to force their way into the upper echelons of the giant tech companies dominating the world economy.