Why a $700B Tesla Motors Inc (TSLA) By 2025 Isn’t Likely?
Tesla Motors Inc (NASDAQ:TSLA) has set an over-ambitious target of reaching a $700 billion market capitalization by the turn of 2025. Leaving many to ponder whether the milestone is even obtainable at all. Will there be such a market for electric car? Will the company be able to make the transition from luxury car maker to provide a cheap affordable electric car at a high margin? What more besides an electric car will Tesla have to do to justify it? Will the company be able to generate the kind of profit that is needed to reach such a high market capitalization by 2025?
These are just some of the questions that Tesla Motors Inc (NASDAQ:TSLA) would have to answer to even come close to achieving its goal. To enable the company reach such a market cap in that time, the company would have to grow at quite the aggressive rate.
During a recent interview, the company’s CEO and founder, Elon Musk, said that Tesla’s value would be similar to that of Apple Inc. (NASDAQ:AAPL) in a decade. In hindsight, the comment sounds illogical to expect the electric car maker to have a market capitalization of $700 billion since the company’s current market capitalization was approximately $25.5 billion.
The comment from Tesla Motors (NASDAQ:TSLA)‘s CEO invited a strong response from different quarters. Many articles questioned as to how Musk would be able to take the company to the level of $700 billion market cap club. Some even termed the statement outrageous, and for good reason.
Reaching the market cap level of $700 billion requires significant growth in Tesla both on a revenue and profit basis in the coming years. On a GAAP basis, the company suffered a loss of $294.04 million or a loss of $2.36 a share in the year 2014, wider than a net loss of $74.01 million or a loss of 62 cents a share in the previous year. Even on an adjusted basis, profit per share was 14 cents for the year 2014.
From the current profit levels of 2014, how much growth will the company need to be able to make a profit of over $35 billion? It is anybody’s guess whether a company, which delivered $3.19 billion revenue in 2014 and delivered 35K vehicles, would be able to achieve this tough target. The profit figure was arrived based on Tesla’s comments of a $700 billion market cap, and applying a 20 PE ratio.
As far as auto companies were concerned, the most profitable one is Volkswagen generating $270 billion sales and $28 billion profit in 2013. Even this figure wouldn’t be enough for a $700B Tesla.
Tesla’s CEO was quoted as saying in January that the company would not be able to make any profit till 2020. This meant that the company’s profit would have to surge from zero level in 2019 to $35 billion in 2024. Will this be possible for a company that entered the scene in 2003?
Additionally, the auto making business needs big capital investments. Robots, Computers, Factories, real estate, and logistics systems command investment. In a nutshell, on average auto companies invest $125 for every $100 in sales generation. Therefore, to generate revenue of $35 billion, Tesla would probably need $375 billion of assets.
Tesla currently only has $1.9 billion in cash and cash equivalents and needs to build its Gigafactory and scale its manufacturing capabilities to meet its target of 500K vehicles by 2020, an ambitious target in its own right. This will take large amounts of capital investment, and probably more share dilution.
A simple equation shows how high the bar is set for Tesla. Assuming a ten percent appreciation for every year for the next decade, the market capitalization of Tesla might increase to approximately $65 billion, which would be almost 11 times less than the $700 billion mark set by Musk.
There is no doubt that Tesla Motors Inc (NASDAQ:TSLA) is a fascinating innovative company that is pushing the limits. There is also a large probability that Tesla will need large capital investment to take its dream of an affordable electric car and make it a reality. Tesla could be very successful and still not even sniff the surface of the $700 billion level by 2025.
As there were already talks of the stock overpriced currently, it is quite unlikely that the market cap of Tesla would reach the $700 billion level by 2025.
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