Never one to shy away from bold predictions, Tesla (TSLA -1.06%) CEO Elon Musk has yet another one, and it's not about his new Neuralink venture that was detailed on Wait But Why last night.
The electric-car maker has been facing some workforce challenges at its Tesla Grohmann unit, the German automation company that it acquired in November. Local workers are feeling uneasy about job security after Tesla killed all contracts with other automotive customers, and they are threatening to strike and want to unionize with IG Metall (the dominant German metalworkers' union).
In an effort to appease the local workforce, Musk has offered a modest salary increase alongside generous equity compensation, a similar approach that the company is taking at its Fremont factory, where there is growing unrest among workers that also want to organize with the UAW. In an email to the local workforce obtained by Electrek, Musk underscores the potential for capital appreciation (translated from German):
These shares can be easily sold for money, but they also open up the possibility of earning much more through stock appreciation. The tenfold increase in our share price over the past five years has made shareholding exceptionally profitable for our Tesla employees. I firmly believe that we have the potential for a further tenfold increase over the next five to 10 years.
Tesla's market cap is currently hovering right around $50 billion, so a "tenfold increase over the next 5 to ten years" would translate into a market cap of $500 billion.
The whole value chain. Image source: Tesla.
That's actually conservative relative to his prior prediction
Musk made headlines last summer when Tesla initially proposed its acquisition of sister company SolarCity. On the conference call to discuss the deal, this comment attracted plenty of jeers (emphasis added):
I think as a combined automotive and power storage and power generation company, the potential is there for Tesla to be a $1 trillion company, market cap company. So if we play a major role in transitioning the world to a new form of energy generation and storage and transport it's what kind of happens. So that's [why] I think one isn't going to be worried about whether it's a few hundred million dollars one way or the other here down the road. It's not going to make a difference.
No company has ever breached that 13-digit threshold, not even the most profitable company in the world. Getting to $1 trillion is clearly an outlandish prediction that's extremely unlikely. But what about $500 billion?
Still outlandish
Tesla is probably the hardest stock in the market to value, given the lack of comparable peers and the breadth of its goals. If you compare Tesla to automakers, which fetch extremely low multiples since they consume copious amounts of capital and often post single-digit net margins, getting to $500 billion seems impossible. If you compare Tesla to large tech companies, which fetch much higher multiples since most tech companies enjoy incredible scale and operating leverage, getting to $500 billion appears at least remotely possible. If you compare Tesla to energy companies, which are among the largest and most profitable in the world since they provide an indispensable commodity, $500 billion doesn't seem unreasonable.
The challenge is that none of the above comparisons are apt. Manufacturing cars dominates Tesla's operations and cost structure, and as such can't scale like other tech companies, even if it approaches product development, design, iteration, and integration like a tech company. The aforementioned energy giants are all oil companies, while solar companies have long struggled due to the tough economics of the solar industry. There are no meaningful pure-play battery companies to compare against either, as most of the companies that dominate the battery space today are Asian conglomerates like Tesla partner Panasonic, LG Chem, or Samsung SDI.
Musk's future
You also have to acknowledge that there is a Musk premium inherently priced in, since he's often considered the greatest visionary since Steve Jobs. In fact, you could even argue that Musk is more important to society than Jobs ever was, given the seemingly endless scope of Musk's aspirations -- electric cars, reusable rockets, colonizing Mars, supersonic VTOL electric jets, interfacing human brains with AI, the Hyperloop, weaning the world off fossil fuels with solar energy, digging holes in parking lots -- that have the very real potential to transform humanity. We're not just talking about consumer electronics here.
Of all of Musk's ventures, Tesla is the only one that's publicly investable, and people simply want to invest in Musk's future. All of that interest gets consolidated into Tesla, contributing to its premium valuation.
Don't get me wrong: I would love Tesla to reach $500 billion in the years ahead, which would make it a 1,000-bagger for me personally. But realistically, while it's theoretically possible, it's not probable, even if Tesla and Musk have a way of defying reality, especially when it comes to valuation.
