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Tesla essentially uses free money to fund its growth, says Bank of America analyst John Murphy. Above is a Tesla car at a battery charging station in Petaluma, California.
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is the king of electric vehicles, although virtually all car manufacturers, from the Chinese start-up
NIO
to the faithful
Ford engine
and
General Motors
-try mightily steal the crown.
But the Bank of America analyst John Murphy offers a reason why Tesla (ticker: TSLA) reigns supreme over its competitors – and it has nothing to do with traditional competitive advantages in the automotive sector such as vehicle engineering, manufacturing excellence or advanced technology such as autonomous driving.
Murphy argues that Tesla is leaving other electric vehicle makers in the dust because of the money — virtually free money that Tesla can use to fund its growth.
Many of Tesla’s new rivals are raising outside capital to invest in product development or expanding factory capacity — and they all pose a risk to Tesla, Murphy wrote in a Monday report.
“Nevertheless, we continue to believe that as long as [Tesla] has the ability to continue to fund outsized growth, with nearly cost-free capital for capacity expansion, its relatively high price is justified,” he added.
What Murphy is saying, in part, is that Tesla is trading at an exorbitant multiple to traditional automakers. Tesla is trading for around 100 times estimated 2022 earnings.
General Motors
(GM), on the other hand, trades for around six times earnings.
So if Tesla issued stock for a manufacturing plant with enough capacity to produce 1 million electric vehicles, the stock should be equal to about 0.5% of its outstanding stock. For GM, the issued shares are expected to equal approximately 8% of its outstanding shares.
With its new factory, Tesla’s installed capacity would increase by about 50% and spending 0.5% of stock for 50% growth would be wise. GM’s total capacity, including its gasoline operations, would increase by perhaps 15%.
Murphy describes a virtuous cycle for Tesla: low-cost equity financing enables aggressive growth, which pushes the valuation multiple higher, and then investors provide even more low-cost financing for more growth. And Tesla remains far ahead of all other electric vehicle manufacturers.
A lower cost of capital can certainly be an advantage for Tesla, but Murphy also implies that investors aren’t set to earn anything on the cash they provide when the company issues stock to fund growth. It’s not: Tesla shareholders want — and expect — the stock to rise over time.
And other EV companies have a low cost of capital by Murphy’s reasoning. The 2021
Rivian Automotive
(RIVN) Initial Public Offering brought more than $13 billion into corporate coffers. This capital increase took place before Rivian had any sales or profits.
Rivian deliveries and production expected to hit about 25,000 in 2022, compared to a handful in 2021.
It is difficult to determine exactly what investors consider an acceptable return for one stock over another. It’s also difficult to compare growth stocks like Tesla with mature companies like GM.
Murphy’s point could simply be boiled down to the idea that Tesla has a lot of business momentum right now. Sales increase while sales of other automakers are down. The penetration of electric vehicles in new car sales is increasing. And Tesla’s profit margins are higher than those of most traditional automakers. The cycle created by this trio of factoids is more virtuous in the long run than Murphy’s.
Murphy is neutral on Tesla stock. It rates Hold stocks and has a price target of $1,100.
The stock rose 5.2% in afternoon trading. Equities reacted positively to first quarter deliveries, reported on Saturday, which were essentially in line with Wall Street expectations. Tesla has managed to deliver more cars despite headwinds from semiconductor shortages and Covid lockdowns in China.
the
was up 0.5%. the
was up 0.1%.
Write to Al Root at [email protected]
