Chris Evans

20th May 2021

Plimsoll Analysis

Tesla - a case study in how to maximise the value of a business beyond its current financial state

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Market watchers have seen a growing divergence over the last decade between share price and the “fundamental” value of the companies behind the stock charts. These major companies are artfully bridging the gap between what the financial picture today says they are worth and what they could be worth in the future.

Tesla Inc is the perfect example. As recently as June 2020, Elon Musk’s EV company was valued at US$883 per share making it the world’s most valuable car brand at more than US$200 billion. But do the fundamentals support such an eye-watering valuation? Here are some top-level financial benchmarks for Tesla Inc compared to the rest of the automotive manufacturing market:

  • Tesla is currently only the 25th largest car maker in the Global market
  • Turnover is still less than a quarter of Ford and the rate of growth is slowing
  • The profit posted for full-year 2020 is the first in its history
  • Latest year profit margin of 3.7% is only marginally higher than the market average of 3.1%
  • Profit returned on assets is half the industry average at only 2.2%
  • Tesla pays US$748m in interest payments and those payments are increasing year on year
  • Debt as a percentage of sales is double the market average at 37.2%

Taking all that into account, how did Tesla, in June 2020, amid the worst human health crisis in a century manage to be worth more than all the legacy car manufacturers combined? The answer lies in the vision that the company sells to its investors. People buying into Tesla are not buying the company as it currently is. They are buying Tesla for the company it will be in 2050 and beyond.

Elon Musk is selling investors a vision of long-range, hi-speed, futuristic transport that is both economical and environmentally friendly. In less than a decade he has changed the focus of the established order from combustion to coding and people are buying into that vision.

As Warren Buffett said when looking for companies to invest in, "What we're trying to find is a business that, for one reason or another -- it can be because it's the low-cost producer in some area, it can be because it has a natural franchise because of surface capabilities, it could be because of its position in the consumers' mind, it can be because of a technological advantage, or any kind of reason at all, that it has this moat around it."

The Tesla moat lies in the technological advantage and brand position investors perceive it to have. It’s expansive network of power and technology plus the “coolness” of the brand, have powered its share price into the stratosphere. But is that moat enough to protect the brand from growing pressures?

By May 2021, the share price of Tesla had fallen to US$576 a share. The profit achieved in 2020 was solely reliant on selling green credits to other manufacturers. Those same manufacturers are now claiming to be on their way to future emissions targets without having to repeat that feat. Growth in the business is slowing.

The rush to an all EV future is gathering pace both at manufacturing and legislative levels. Car brands at all levels are now jumping wholesale into the EV space. From Audi’s E-Tron GT to Ford’s Mustang E-Tech, Porsche’s Taycan to Chinese EV leader NIO - rival forces are closing in on Tesla’s moat as consumers can choose similar performance from other, more familiar brands and with styling to suit their needs.

Despite all this, Tesla Inc remains the world’s most valuable car brand, and that is a lesson that all business leaders and key stakeholders need to learn. How do all companies, in all industries, and of all shapes and sizes ensure that they too get the most return on the time and resources they invest in building their business?

The answer is “selling the vision”. Not a vision of what your business is now but what it could be to future investors, buyers or stakeholders. Bridging the gap between what your financial results indicate your business is worth to a potential value, requires precise planning, analysis of options and the ability to see beyond today.

At Plimsoll, we specialise in helping companies to maximise their value by providing the analysis they need to develop their own vision to prospective investors and stakeholders. To maximise the potential value of your business, imagine being able to present to potential investors:

  • A list of companies your business could buy in the future to consolidate its position
  • A breakdown and understanding of potential markets you could pivot to and the potential of each
  • A demonstrable understanding of your supply chain including alternative options and potential takeover opportunities
  • A current and potential value to show your vision is built on solid foundations

Succession planning, to be successful, must be a multi-year journey. To prevent making a snap decision on an “out of the blue” offer for your business, you need to be prepared and informed on an ongoing basis. Plimsoll provides concise, easy to use and presentable analysis solutions for business owners who want to be sure they get the best possible value for their business.

Click here for more information on how we can help you or give our specialist valuations team a call on 01642 626470.

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