In terms of market capitalization, Tesla ranks first among automobile manufacturers. On November 4, 2021, the highest closing price for Tesla stock ever recorded was a groundbreaking $1,229.91. And currently, as of August 19, 2022, Tesla has a market capitalization of $929.6 billion, which is almost three times the market capitalization of Tesla’s closest competitor – Toyota. Even if we added up how much Toyota, BYD, Volkswagen, Mercedes-Benz, BMW, General Motors, and Ford are worth right now, the value would still be lower than that of Tesla. After selling nearly 936,200 units of automobiles in 2021, Tesla was the best-selling electric vehicle manufacturer in the world, with a market share of just under 14%. However, of the total number of cars sold globally, only 8.57% of them are EVs.
With all this information in mind, it’s reasonable to wonder how Tesla’s stock price rose so quickly with such a small share of the market and sales volume. Can Tesla justify this valuation and maintain its dominant position in terms of market capitalization? Or are the prices of Tesla shares going to drop soon? Let’s find out in this article.
Why Is Tesla’s Market Cap So High?
With its innovative approach and disruptive business model, Tesla has achieved what seemed impossible to many. Here are a few of the key reasons that have contributed to Tesla’s overall market cap.
Tesla’s business model is quite different from most other automobile manufacturers because the company owns the entire supply chain. With this strategy, the ultimate goal of the company is to reduce manufacturing and sales costs in order to secure its future. Also, Tesla’s strategy for managing its supply chain is based on a long-term growth plan that includes production, inventory management, and shipping. Simply put, they do not require a middleman.
It has established a worldwide network of company-owned showrooms and galleries, primarily in major cities like New York, London, and Tokyo. They have their own battery-making facility in their Giga Nevada Factory, which was the first major step to securing battery cell supply for uninterrupted growth. Plus, Tesla is now manufacturing its own chips too. They also never source the programs for their chips; they write them on their own. Overall, Tesla has established a strong supply chain that has secured its production for the future. This promising business model has helped Tesla gain its investors’ trust.
Ahead of the Competition
The world is quickly shifting from fossil fuels to clean and sustainable energy, which is why EVs are taking over so quickly. Of the total number of cars sold globally, only 5% of them are EVs, and it is predicted that the share will increase to 20% by 2020 and leap to 40% by 2030, forming an S-curve on the sales chart. And in the race of EV manufacturers, Tesla is far ahead of its competitors.
According to 2020 statistics, 79% of newly registered electric vehicles in the United States were Teslas. In addition, they aim to sell 20 million electric vehicles annually by 2030. So, not only has the price of the company’s stock skyrocketed, but the company itself has also seen massive expansion. According to Elon Musk, Tesla has achieved an impressive 71% compound annual growth rate (CAGR) since Q4 2016. Thus, as the world is moving fast forward towards EVs, people are becoming more interested in Tesla’s shares.
Tesla has some of the world’s largest car manufacturing facilities. In the first quarter of 2022, Tesla delivered more than 311,000 electric vehicles. Moreover, they have predicted that 1.5 million vehicles will be delivered by the calendar year 2022.
Taking into account how many EVs their current Gigafactories can make, Tesla’s goal is not impossible. The Tesla Factory in Fremont, California, for instance, is capable of producing up to 600,000 vehicles per year. Nevada, New York, and Shanghai are home to three additional active Gigafactories similar to this one. In addition, two additional Giga factories in Berlin and Texas are about to begin production. Thus, Tesla continues to break their own production records.
In the automotive industry, Tesla is regarded as one of the most cutting-edge manufacturers. They’re already making the most advanced batteries and will be releasing the million-mile battery soon. Tesla cars are packed with ingenious features, such as the most advanced Autopilot system, the Supercharging network, and keycard access to the vehicle.
In addition, their vehicles feature unique modes such as a bioweapon defense mode, sentry mode, ludicrous mode, and plaid mode. All these technologies are futuristic and appealing to their users, which indicates the future potential of Tesla. The current growth of Tesla in sales also supports this point. Hence, that’s why investors chose to believe in the future of this company.
Elon Musk Himself
Elon Musk is currently one of the most influential people on the planet, and Time magazine has named him the 2021 Person Of The Year. Elon has initiated a number of innovative businesses and currently leads Tesla, SpaceX, Neuralink, and The Boring Company. On the list of Twitter’s top five most-followed users, Elon Musk’s tweets have been observed to gain the most attention. He is influential at such a level that his posts can affect the markets and stock prices.
To their surprise, analysts have discovered that Tesla stock moves more when Elon Musk tweets frequently. Elon, as the co-founder and CEO of Tesla, is responsible for all product design, engineering, and global production of the company’s electric vehicles, battery products, and solar energy products. This also made people invest in Tesla as people trusted in his capabilities to make things possible.
Will Tesla Shares Drop Soon?
Most investors know that the risk of an investment goes up as the valuation of a company goes up. Similarly, Tesla shares are also prone to a sudden drop as they are valued very highly. This brings us to the question, how long will this continue?
As Tesla leads the industry, it is also paving the way for other EV brands. The major car companies used to be stuck on their old internal combustion technologies, but now they are moving toward electric cars as they also see their massive potential for growth in this sector. Car companies in Korea, Japan, Germany, and, of course, China are all coming up with new products to compete with Tesla. There are signs that Tesla’s market share might be affected as competing brands become more efficient at making EVs. In the second quarter of this year, Tesla had 66.3% of all EV registrations. This is much less than the 79.5% it had a year ago. If this is the case, then there is a chance that Tesla stock prices will drop in the future.
Nevertheless, TSLA is trading at a 142.52x multiple of its FCF. According to analysts, with FB trading at 15.19x FCF, GOOGL at 23.42x FCF, and AAPL at 25.4x FCF, it is hard to justify any number above 20x for TSLA. In this sense, Tesla is overvalued and might lose its market cap.
Moreover, Tesla’s valuation, to some extent, depends on its CEO, Elon Musk, which may have a negative effect on the company. Just one day after Twitter’s announcement that it had accepted Musk’s $44 billion takeover bid, Tesla shares dropped 12.2%, wiping out more than $125 billion in market value. Tesla’s (TSLA) stock has declined substantially over the past few months and has been removed from the S&P 500 ESG Index. But to be fair, this kind of controversial news will affect the market value of any company.
Is the Valuation Justified?
Tesla has a huge market cap compared to its competitors, which seems quite a bit inflated. Analysts predict that this could change at any point. On the other hand, this is a company that’s only just begun to disrupt the automotive industry, despite its relative infancy. Their cars are yet to reach many places of the world where Tesla can make a huge difference. At this time, TSLA stock is something that people have strong opinions about, and only time will tell if Tesla’s valuation is truly justified.