On Wednesday, Tesla reported third-quarter revenue of more than $21 billion, up 56% yearly. Even after price increases, it delivered 42% more cars to customers. According to boss Elon Musk, the automaker can grow that number by 50% annually to 20 million by 2030. After last quarter’s supply chain-induced slowdown threatened progress, the company is almost back on track.
Shares of Tesla, the leader in electric vehicles, seem reasonably priced after falling 45% this year – if promises of iPhone-like dominance in the sector come true. However, a wrinkle in this quarter’s results indicates a possible demand decline. Returning money to shareholders only works if the Austin, Texas-based company’s Apple-sized dreams come true.
Tesla’s 17% operating margin beats the gasoline-guzzling operations of rivals Ford Motor and General Motors – whose EVs are even less profitable. As a result, its cars resemble Apple’s iPhone. According to Counterpoint Research, the Cupertino-based company accounts for most of the smartphone industry’s profits; Tesla can make the same claim for the EV industry.
In that sense, Tesla’s $700 billion valuation is reasonable. But there are wrinkles. The company delivered 6% fewer cars than it made this quarter, the most significant difference ever in absolute terms, which it blames on problems with shipping. The concern is that the gap instead points to slowing demand growth.
The market seems confident that Tesla, like Apple, can beat its doubters, remain profitable and at least come close to its 2030 target. Assume that succeeds and that revenue per car is about $45,000 while operating margins in the core business remain at 15%. Put the resulting operating profit to Ford’s multiple, discount it by 10%, and the company’s shares should be worth $249, just above Wednesday’s closing price of $222.
Apple faced a similar tense moment of shrinking earnings and growth in 2013. Investors like David Einhorn and Carl Icahn demanded that the company use its cash to buy back weakened shares. With its share price falling, it would make sense that Tesla would feel the same pressure to pull that lever now.
But Apple began 2013 with $137 billion in cash and marketable securities; Tesla has $21 billion. Tesla also has significant cash needs. Capital spending this year should be about 34% of that pile, compared with 6% at Apple.
Musk has shown that he deserves the benefit of the doubt when producing cars. But when it comes to paying dividends, returning cash to shareholders is a risk.