A Tesla Model Y at a charging station in Sydney, Australia.
Brendon Thorne/Getty ImagesTesla ‘s CEO, Elon Musk, has been changing the way people think about valuing a car business. That’s been a great thing for the company’s investors, who have made out like bandits in the past year.
That paradigm shift could be great for other car makers, too: There are potentially billions of dollars worth of hidden value locked up in the auto sector.
First, a bit of context. In addition to making electric vehicles, Tesla (ticker: TSLA) sells software, backup battery power, solar panels, and insurance. It also has plans for robotaxis—self-driving taxi services—and supplying batteries to other EV makers in the works.
Morgan Stanley analyst Adam Jonas values Tesla by looking at the different businesses separately. He rates Tesla shares Buy, with an $880 price target. But he believes Tesla’s car business is worth only $345 a share. That works out to roughly $345 billion for the auto-building franchise. (Tesla has about 950 million shares outstanding and more than 1.2 billion on a fully diluted basis, which includes things such as management stock options. Using 1 billion shares makes the math very easy—$345 a share equals $345 billion dollars.)
Only 40% of Jonas’ price target comes from what he projects the car business is worth. The rest stems from software and services, which Jonas says are worth about $246 billion. Don’t forget: Tesla already has a nationwide network of EV chargers and offers full self-driving mode software as a $10,000 upgrade to its customers.
As for the other parts of Tesla’s business? Jonas says Tesla’s battery supply business is worth about $100 billion and its robotaxi business an estimated $77 billion. He thinks Tesla’s backup battery power business is worth $75 billion, and pegs its insurance operations at $36 billion.
People say imitation is the sincerest form of flattery—and other car makers, including General Motors (GM) and Ford Motor (F), are now taking a few pages out of Tesla’s playbook by spending billions on electric-vehicle development. They also each have new potential revenue streams based on what Tesla has accomplished by selling software in addition to cars.
GM, for instance, has its Cruise autonomous-driving division, which will eventually launch a robotaxi business. GM has also expressed interest in becoming a battery technology supplier.
Meanwhile, Ford has its own plans for self-driving cars and is building a connected-services business. During Ford’s recent earnings conference call, the company’s new CEO, Jim Farley, talked about leveraging Ford’s strength in pickup trucks and commercial vehicles to build a services business around vehicle maintenance and uptime for Ford commercial customers.
Ford and GM are after more than just car sales, just like Tesla. Musk might not end up disrupting the legacy car business—but he may end up saving it by training customers to get used to paying monthly fees for things like software designed to make their vehicles better. The job for investors, meanwhile, is to figure out what Ford and GM’s ancillary businesses are actually worth.
It’s a reasonable bet that neither company’s stock price accounts for those new businesses. Both Ford and GM stock trade for roughly eight times estimated 2022 earnings. That is not a price/earnings ratio that implies much growth. Tesla’s car business, based on Jonas’ value, trades for roughly 60 times earnings. Tesla, of course, is still growing rapidly: Analysts project its vehicle sales will grow about 67% in 2021.
For Jonas, the value of Tesla’s in-the-works robotaxi business makes up about 20% of the value of the car business. That percentage yields about $15 billion of hidden value for GM and $9 billion for Ford, based on both Detroit auto makers’ market value. It’s a nice gain, but that’s not where the big potential value is.
Instead, it lies in software and services. Jonas, when valuing Tesla’s connected-services business, assumes Tesla can generate $100 each month from drivers by the end of 2030 by offering them software upgrades and related services. That monthly subscription amounts to $20 billion in high-margin sales, based on his belief that Tesla will have about 16.5 million vehicles on the road by then.
Here’s the thing: The amount of new, connected Ford and GM vehicles in the U.S. by 2030 should be roughly 50% to 100% larger than the number Tesla will have in the country at that point. Tesla may be growing faster right now, but Ford and GM are still larger car sellers and have been selling millions of cars a year for decades.
Similar assumptions yield roughly $40 billion in new annual revenue for GM and $30 billion for Ford by 2030. To give more context, $70 billion for both might amount to 25% of sales by then. Connected services is a big, hidden asset for legacy auto makers.
At the same valuation multiple that Jonas uses for Tesla’s connected services business, GM’s connected-services business is worth $480 billion and Ford’s is worth $360 billion. Both numbers are multiples of the entire value of both companies in the marketplace today. Tesla, however, is Tesla. It might have an easier time selling services and software. It certainly has a lead on the competition. Still, haircutting the GM and Ford numbers by even 50% or 75% yields big numbers relative to today’s market values.
Last year, Tesla became the world’s most valuable auto maker. Shares rose more than 740% in 2020, crushing the S&P 500 and Dow Jones Industrial Average. In 2021 and beyond, a job of the traditional car business isn’t only to make EVs. It’s taking some of Tesla’s ideas about ancillary sales and applying them to their businesses.
Write to Al Root at allen.root@dowjones.com
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