One of the market's hottest stocks this year is Tesla Motors (TSLA 1.24%). The maker of next-gen electric cars is trading 73% higher in 2020. Larger U.S. automakers are driving in reverse. Ford (F 1.71%) and General Motors (GM 1.35%) have plummeted 47% and 39%, respectively, this year.
Tesla bulls will argue that the divergence makes sense because most of them don't see the market darling as an automotive stock. Tesla Motors is a tech stock, the argument goes, more like Apple (AAPL 1.62%) -- the iOS giant that reportedly once tried to acquire it -- than Ford or GM. Let's size up the arguments for Tesla as a tech stock.
Shifting into a new gear
There are some ways that Tesla is a tech stock, and perhaps even a lot like Apple itself. However, the obvious reason bulls don't want to lump Tesla into the category of automakers is that it's valuation is out of whack in that arena.
Tesla's enterprise value of $143 billion -- and it's important to use enterprise value instead of market cap given the highly leveraged ways of older car manufacturers -- is roughly between General Motors at $120 billion and Ford at $154 billion. The problem is that Ford and GM are generating roughly six times the trailing revenue of Tesla.
The bullish justification has historically been that Tesla deserves a huge premium given its heady growth, but that hasn't been the case lately. Revenue declined in the third quarter of last year, recovering only slightly with a 2% increase in its latest quarter. Tesla is moving more cars, but the sales mix is moving to the cheaper Model 3 (and now the Model Y) at the expense of the pricier S and X models.
Tesla has rolled out cheaper cars to reach a broader market, and the same can be said about Apple with its entry-level gadgetry. A big difference is how each one stacks up when it comes to margins. Tesla's gross margin has decelerated for three consecutive years, clocking in at 16.6% last year. Ford and General Motors are lower at 8.3% and 10.3%, respectively, but it's no match for Apple at 37.9%. It should also be said that Apple's gross margin clocks in lower than other software-heavy tech giants.
Apple and Tesla both sell hardware, but Apple keeps nibbling away at you with opportunities to generate high-margin services revenue. Where is Tesla's app store? Where is its iCloud? Tesla cars aren't cheap, but a big selling point is that the cars cost a lot less to maintain. In short, the showrooms are making less after the sale than other car companies.
It's OK to be bullish on Tesla the company, and the stock's always going to be a tricky stock for naysayers to short. We're seeing shorts getting squeezed again now, even as automakers are reeling. There is a lot of neat tech to Tesla, and it's perpetually raising the bar. In time it may evolve into a tech stock on wheels, especially as it builds out services and subscription platforms. However, just because it's overpriced as an auto stock doesn't mean Tesla can be hoisted up as the next great tech stock or the Apple of its niche.