Tesla (NASDAQ:TSLA) stock is uninvestable as a pure electric vehicle (EV) play. However, CEO and product architect Elon Musk has been asking us to value his company as a technology stock, and not a car company, for years. So what’s the value proposition?
An awful lot of EVs
Firstly, I’m starting with the EVs and the company’s valuation. Tesla’s main revenue stream is, of course, the cars it sells. All of which are EVs.
Tesla was once dominant in the EV segment, but that’s no longer the case. That’s partially due to Beijing’s subsidies for Chinese-built machines but also because other companies have caught up.
However, at 71 times forward earnings, Tesla’s trading at a 300-400% premium to its Chinese EV peers. It’s experiencing margin compression amid increasing competition and the Musk-initiated price war. Tesla’s recent performance hasn’t impressed investors.
It’s going to have to sell an awful lot of EVs to justify this crazy valuation. Analysts certainly don’t think that’s going to happen, and that’s highlighted by its price-to-earnings-to-growth (PEG) ratio of 5.84.
Waiting for the next big thing
Investors are waiting for the next big thing, and Musk thinks that’s the Robotaxi. On 8 August, Tesla will reveal its Robotaxi to the world.
I’m a little sceptical as I didn’t believe Tesla was anywhere near delivering a Level Five autonomous vehicle. I don’t think other analysts did either. However, Musk sounds pretty confident his company has the technology nailed down.
The potential’s huge. Firstly, Tesla’s autonomous vehicles will be sold as personal vehicles and it’ll be the first company to do so.
Secondly, Tesla can roll out its own fleet of taxis. There’s potential for big margins here, essentially replacing car vendors, taxi drivers, and hailing platforms in one swoop.
And finally, there’s the sale of spare computer power. This could actually be the biggest revenue generator. The premise is that the AI required to operate autonomous vehicles also demands a vast amount of computing power.
But these cars won’t be in operation 24/7 — maybe the taxis will — and this means there will be a huge amount of computing power lying vacant. In a model similar to Amazon Web Services (AWS), Musk wants to sell that computing power.
Musk’s forecasts
AWS could generate around $100bn in revenue for Amazon this year. That’s crazy when you consider it’s essentially the sale of excess computing power. Tesla could do something similar.
“So if you can imagine the future, perhaps where there’s a fleet of 100m Teslas, and on average, they’ve got like maybe a kilowatt of inference compute. That’s 100 gigawatts of inference compute distributed all around the world,” Musk said in the Q1 earnings call.
My take
This all sounds wonderful, but I’m a little hesitant to put my money behind a company with a PEG ratio of 5.84. We just don’t know enough about the Robotaxi yet, and Musk does have a habit of overpromising and underdelivering.
I’m not buying for now but if he can pull it off, Tesla may be worth its valuation.
