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DOING THE MATH

Elon Musk is right: Tesla could be as big as Apple someday

Elon Musk, CEO of Tesla Motors, reacts to a reporter's question following the electric automaker’s initial public offering on Nasdaq, Tuesday, June, 29, 2010 in New York. (AP Photo/Mark Lennihan)
AP Photo/Mark Lennihan
Your guess is as good as mine.
By John McDuling
Published Last updated This article is more than 2 years old.

Elon Musk claims that in a decade’s time, Tesla could be worth as much as Apple is now. Given that Apple just this week became the first company with a $700 billion market value, it seems pretty optimistic, absurd even.

Certainly, no one seems to be taking the statement very seriously today. Tesla shares are down more than 5% on the disappointing financial results the company released last night.

Here’s Musk on a conference call discussing the numbers with investors and analysts:

If you take this year’s revenue, around $6 billion or thereabout, and if we’re able to maintain a 50% growth rate for 10 years and achieve 10% profitability number and have a 20 p/e [price-to-earnings-ratio], our market cap would be basically the same as Apple’s is today.

That’s a lot of ifs. (Musk himself prefaced his statement by acknowledging “I’m not saying they’re true or that they will occur, but I bet that they do occur”.)

But here’s another if: What if Musk is actually right? After all, the man has done plenty of things people thought impossible before.

Here’s what would need to happen.

For Tesla to be valued at $700 billion on a price-to-earnings multiple of 20, it would need to be generating profits of $35 billion. Using Musk’s stated profit margin goal of 10%, that means the company would need $350 billion in revenue. Assuming an average Tesla vehicle sales price of $60,000, that translates into sales of about 5.83 million cars a year by then.

That would be an utterly astonishing increase from the 35,000 cars Tesla sold last year. But Toyota and Volkswagen each sold (paywall) more than 10 million vehicles globally in 2014, and total auto sales globally are expected to top 88 million this year. So a 10-year annual sales target of 5.8 million vehicles for Tesla isn’t entirely ridiculous.

Not many Wall Street analysts have published projections out as far as 2025. A note published by Morgan Stanley’s Adam Jonas this time a year ago forecast Tesla selling about 821,000 vehicles by 2025, at an average price of $58,138. That implies revenue of about $48 billion. With an operating margin of 15% and a tax rate of 19%, you get to a profit approaching $6 billion.

All that is far short of the $35 billion profit and 6 million in sales that Musk’s offhand remark implies.

Yet Tesla still might achieve the $700 billion market valuation if Jonas’ forecasts prove accurate—if investors were prepared to pay a higher earnings multiple for its shares (specifically, 120 times earnings, rather than the p/e of 20 envisioned by Musk). This could happen, if in 10 years investors still think Tesla has enormous growth potential, whether on the basis of its car sales or its battery business.

And this is not completely out of the question, either. Don’t forget, Tesla has a market value of roughly $25 billion currently, and that’s on no profit at all.

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