Tesla (TSLA -5.17%) Chief Govt Officer Elon Musk is not any stranger to hyperbole.
Musk, who additionally runs SpaceX and numerous different corporations, has been identified to make huge typically exaggerated guarantees. For instance, he as soon as referred to as the Hyperloop, which was by no means constructed, the “fifth mode of transport” and famously promised to take Tesla non-public in a Twitter submit, saying he had secured financing that he did not have.
Nonetheless, Musk additionally has a monitor report of finally fulfilling a few of his huge guarantees. For instance, the Cybertruck turned a actuality in late 2023 after years of hype. Now he is made one in all his greatest predictions but.
Beforehand, Musk had mentioned Tesla can be the world’s Most worthy firm, however on Tesla’s fourth-quarter earnings name final week, Musk raised the bar, saying:
“I am not saying it is a straightforward path, however I see a path to Tesla being essentially the most useful firm on the earth by far. Not even shut, like perhaps a number of occasions greater than — I imply, there’s a path the place Tesla is value greater than the subsequent high 5 corporations mixed.”
At the moment, the 5 Most worthy corporations within the U.S. are Apple, Microsoft, Nvidia, Alphabet, and Amazon, and so they have a mixed market cap of almost $15 trillion, which means Musk expects Tesla’s valuation to achieve a minimum of $15 trillion (it is about $1.2 trillion as of this writing). The valuation of these different corporations ought to enhance as they develop, so Musk is de facto forecasting an excellent bigger valuation for Tesla, although it is arduous to think about what that can be sooner or later.
Picture supply: Tesla.
Musk’s math
Musk did not define the arithmetic behind that forecast, but it surely’s clear he believes that full self-driving autonomy and working a robotaxi market is the trail to getting there.
The Tesla chief has lengthy envisioned an autonomous ride-sharing market unlocking monumental worth for Tesla and famous on the decision {that a} typical passenger automobile is just used about 10 hours per week. Based on his estimate, an autonomous car that could possibly be shared can be used 50 to 55 hours per week, and he argued that such a transition can be the “largest asset worth in human historical past.”
It is arduous to place a greenback determine on that type of enterprise, however Uber (UBER 0.66%) might supply a superb proxy.
Uber hasn’t reported fourth-quarter earnings but, however the firm is on monitor for roughly $160 billion in gross bookings, and that quantity continues to be rising shortly, up 16% within the third quarter. That represents how a lot cash clients are spending on ride-sharing and supply. Uber solely retains a small fraction of that as income, whereas the bulk goes to drivers.
Nonetheless, in an autonomous car regime like Musk imagines, all of these gross bookings would go to the proprietor, and Musk appears to imagine it’ll have software-like gross margins, which could possibly be within the 80% vary. The prices to function the community will primarily be charging and upkeep. If Tesla was in a position to acquire $160 billion from ride-sharing at an 80% gross margin, it will preserve $128 billion as gross revenue. That may be way more than Tesla’s gross revenue of $17.5 billion in 2024, however working bills would even have to extend to help the ride-sharing market.
If we assume a 50% working margin for Tesla on the ride-sharing community, it will earn $80 billion in working earnings on high of the $7.1 billion the enterprise earned final 12 months.
If Tesla’s internet earnings have been to strategy $100 billion, a valuation of $15 trillion would nonetheless imply a sky-high price-to-earnings (P/E) ratio of 150, which appears implausible. Tesla at the moment trades at the same P/E ratio, however that is as a result of excessive expectations are baked into the share worth primarily based on the potential for autonomous automobiles.
Can Tesla get there?
Over an extended sufficient timeframe, Tesla might get to a valuation of $15 trillion. In any case, only a few years in the past there have been no corporations value $1 trillion, and now there are 9 within the U.S. alone.
Nonetheless, even when the robotaxi community is a hit, Musk’s purpose of Tesla being extra useful than the subsequent 5 Most worthy corporations is farfetched. No firm has achieved that in trendy historical past and can possible not ever as it will be close to unattainable for one firm to command that a lot of the inventory market’s worth.
Musk’s visions of autonomy do maintain promise, however traders should not get carried along with his sky-high forecasts. Take his predictions with a grain of salt and preserve your eye on fundamentals and what’s occurring with autonomous driving in the true world. Tesla might nonetheless be years away from any autonomy breakthrough significant sufficient to hit the underside line.
John Mackey, former CEO of Complete Meals Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of administrators. Suzanne Frey, an govt at Alphabet, is a member of The Motley Idiot’s board of administrators. Jeremy Bowman has positions in Amazon and Nvidia. The Motley Idiot has positions in and recommends Alphabet, Amazon, Apple, Microsoft, Nvidia, Tesla, and Uber Applied sciences. The Motley Idiot recommends the next choices: lengthy January 2026 $395 calls on Microsoft and quick January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure coverage.
