Please ensure Javascript is enabled for purposes of website accessibility

Why Tesla Isn't Your Average Tech Company

By Travis Hoium - Oct 28, 2017 at 10:32AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Tesla is being treated like other major tech companies, but it doesn't look anything like them.

Investors and analysts often conflate Tesla's (TSLA -0.47%) position in the auto and energy industries with Silicon Valley's position as a disruptive force in business. It's easy to talk about the way companies like Facebook (META 0.23%), Alphabet (GOOG -1.65%) (GOOGL -1.57%), Apple (AAPL -1.19%), and Amazon (AMZN -2.01%) have upended traditional businesses like retail, TV, music, and advertising and think Tesla will be able to do the same in the auto industry. That tech association is one reason Tesla has a valuation of $57 billion, more than most other major automakers despite its much smaller manufacturing output. 

The problem is that Tesla isn't anything like traditional technology companies. It's a manufacturing company at its core, and its manufacturing prowess will determine whether it succeeds. Yet manufacturing is expensive and simply doesn't generate the returns tech companies are normally used to seeing

Tesla Model S in a driveway.

Image source: Getty Images.

Tesla has spent billions building plants and will spend billions more

Tesla's manufacturing business is very different from the asset-light business models of Facebook, Alphabet, Apple, and even Amazon. I'll start with the sheer amount of assets the company has on the balance sheet -- even before it's fully built the Gigafactory or completed its build-out of Model 3 manufacturing capacity. 

TSLA Net PP&E (Quarterly) Chart

TSLA Net PP&E (Quarterly) data by YCharts.

You can see that Tesla has spent nearly half as much on property, plants, and equipment (PP&E) as Amazon, the retail and cloud behemoth. Other tech companies have more PP&E, but they also generate many times more revenue than Tesla. 

The goal of building PP&E is to generate a return on assets. The return on these assets for Tesla is troubling. You can see that Tesla is the only company with a negative return out of this group of companies.

TSLA Return on Assets (TTM) Chart

TSLA Return on Assets (TTM) data by YCharts.

Another thing tech companies usually have in common is that each incremental dollar of revenue is very high margin. They have fixed expenses like engineers and other overhead, but as they grow they can generate high profits as revenue grows because they have high margins. Tesla is at the bottom end of the margins of these comparable tech companies. 

TSLA Gross Profit Margin (TTM) Chart

TSLA Gross Profit Margin (TTM) data by YCharts.

Tesla not only doesn't have high margins on incremental sales, it would have to invest billions more in factories if it grew beyond current capacity limitations. 

There's no lock-in at Tesla

The other factor that's driven tech valuations through the roof is the lock-in tech companies have. Once everyone is using Facebook it's virtually impossible to start and grow another social network. Alphabet has made all other search engines irrelevant with its size and power, growing stronger and smarter simply because it's the biggest search engine in the world. Apple's platform includes the App Store, iTunes, iCloud, and other services that work seamlessly and make it easy to add more Apple devices and hard to begin using competing products. Add Amazon and tack on streaming TV, music, cloud, virtual assistance, and anything else it wants because it's the go-to place for e-commerce. The switching cost to leaving these platforms is very high, making their businesses very valuable. 

Where is Tesla's lock-in? If I own a Tesla, does that make me more likely to buy another Tesla? Maybe, but that's likely because of brand loyalty more than product lock-in. Would I be more likely to buy a Tesla-branded solar system? Not necessarily, because a solar system that costs $10,000 or more would have its own set of pros and cons for buyers. 

You can see where companies like Facebook, Alphabet, Apple, and Amazon have a recurring revenue stream once customers are locked into their platforms. There's not the same kind of powerful lock-in at Tesla, and if another automaker or solar company makes a product consumers find compelling, they could easily switch with little to no switching cost. 

Tesla doesn't deserve a tech valuation

Tech companies get unusually high valuations in comparison to revenue and earnings in part because their models are asset light, high margin, and come with an extremely strong lock-in. Tesla doesn't have any of those things going for it, yet investors are pricing it like a tech stock. I think that makes the stock a high-risk investment because any misstep will be magnified given Tesla's need to invest billions in its manufacturing business. And Tesla doesn't have any history of showing that those investments will pay off for investors. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$682.24 (-0.47%) $-3.23
Apple Inc. Stock Quote
Apple Inc.
AAPL
$137.58 (-1.19%) $-1.65
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,198.89 (-1.57%) $-35.14
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$106.73 (-2.01%) $-2.19
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$164.32 (0.23%) $0.38
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,208.00 (-1.65%) $-37.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.