Tesla Is Racing Ahead, But Is It Worth 17x BMW?

GOTHENBURG, SWEDEN – 2019/09/14: An American automotive and energy company that specialises in … [+] electric car manufacturing Tesla logo seen in Gothenburg. (Photo by Karol Serewis/SOPA Images/LightRocket via Getty Images)

SOPA Images/LightRocket via Getty Images

Since our last update comparing Tesla (NASDAQ: TSLA) and BMW in October 2020, Tesla stock has rallied by almost 2.5x, with its market cap crossing the $1 trillion mark. On the other hand, BMW stock is up by about 40% over the same period, with its market cap standing at about $65 billion. So how do the two companies compare in terms of delivery growth, margins, revenues, and valuation metrics? See our analysis BMW And Tesla: A Detailed Comparison for more details. Parts of the analysis are summarized below.

Tesla’s operational performance has improved considerably compared to BMWs. Tesla’s total deliveries grew at a compounded rate of 58% over the last five years to about 500,000 units, while BMW has seen its deliveries remain almost flat over this period, due to the decline it saw through Covid-19. Considering that Tesla hasn’t really been hit by the ongoing semiconductor shortage and projects 50% delivery growth going forward, it is likely to see deliveries surpass BMW by 2025 or so. Tesla’s gross margins are also now well ahead of BMW’s, standing at almost 26% in 2020, compared to about 19% for BMW (adjusted for R&D costs). Tesla’s margins are poised to rise higher still this year, as economies of scale improve and as it likely scales up sales of its self-driving software. Tesla is also managing its operating costs better, with both its selling and general expenses and research and development spending declining fairly consistently as a percentage of revenue.

So clearly, Tesla is growing much faster than BMW, with its margins on the uptrend, and its production and operational metrics looking progressively better. However, with a market cap of about $1.1 trillion, is Tesla really worth about 17x BMW or effectively more than all the other major automotive companies combined? We don’t think so. We value Tesla at about $610 per share, about 45% below the current market price. See our analysis on Tesla Valuation: Expensive or Cheap for more details.

[10/5/2020] Tesla is valued at 8x BMW. Does this make sense?

Tesla (NASDAQ: TSLA) stock has soared by over 4x this year and Tesla’s market cap stands at about $400 billion, compared to about $50 billion for the BMW Group. Tesla also trades at a trailing P/S multiple that is almost 40x BMWs. This comes despite the fact that BMW’s revenues are about 5x Tesla’s, and its deliveries are about 6x Tesla’s. Does this make sense? Not entirely, but there are a couple of factors that support a valuation premium for Tesla, including its significantly higher growth, expanding margins, and growing software sales. In this analysis, we compare Tesla’s financial and operating metrics with the automotive business of the BMW Group. We break up our analysis into revenue metrics, margins, and cost metrics. See our complete analysis BMW And Tesla: A Detailed Comparison for more details. Parts of the analysis are summarized below.

Tesla’s Deliveries A Fraction OF BMW, But It’s Clearly Gaining Ground In the U.S.

Tesla’s Total Deliveries Stood At 370K Units In 2019, Compared To About 2.5 Million Units For The BMW Group. Tesla’s deliveries have risen from about 32k units in 2014 to 368k units in 2019, a growth rate of over 60% per year, driven partly by the launch of the Model 3 in 2017. BMW, on the other hand, has seen its total deliveries (including Mini and Rolls Royce) grow from 2.1 million units to 2.5 million, a growth rate of under 4%. Tesla has considerable room to scale up, given that it still largely caters to the U.S. market with just 4 models in its lineup, including the Model Y that was launched earlier this year. In comparison, BMW has over 10 model lines, with multiple variants. Tesla already sells more Model 3 vehicles in the United States than all of BMW’s luxury sedans, so this could be an indicator of its potential as it scales up globally, with new factories. Moreover, Tesla also plans to offer increasingly affordable vehicles going forward.

Tesla’s ASPs have declined from $95k in 2014 to $57k in 2019 and it’s likely that the number will fall further as the sales mix of Model 3 and Model Y rises. BMW’s ASPs have declined from $47k in 2014 to $43k in 2019. Tesla’s Automotive Revenues have grown from $3 billion in 2014 to $21 billion in 2019. In comparison, BMW’s revenues grew from $100 billion to $109 billion.

How Do Tesla’s Cost & Margin Metrics Compare With BMW

Tesla’s Automotive Gross margins were roughly comparable with BMW’s Gross margins at about 21% in 2019. Note that we are adding back R&D expenses to BMW’s reported gross margins, as the company considers R&D a part of direct costs. Tesla is also making solid progress in reducing its operating expenses. Selling, General, and Administrative (SG&A) expenses as % of revenues stood at 11% in 2019, down from 19% in 2014, as the company streamlined its retail operations. The metric for BMW has remained in the 8% to 9% range over the same period. On the R&D front, Tesla has significantly scaled back its expenses, with the metric falling from 15% in 2014 to 5% in 2019, bringing them roughly in line with BMW’s. As Tesla continues to double down on self-driving software sales, cuts battery costs, and builds a greater scale with new factories and models, it’s very likely that its margins will scale up further, eclipsing BMWs.

While Tesla is certainly selling more cars and doing so more efficiently, this alone doesn’t justify its massive valuation premium over BMW. Investors are taking a long-term view with Tesla, betting that the company’s innovative tech and the vision of CEO Elon Musk could help it play a big role in the future of the transportation industry. The stock makes sense at current valuations only if you believe in Tesla’s massive self-driving leadership and that growing software-as-a-service sales will translate into sizable profits down the road.

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