As the pioneering company of electric vehicles, Tesla (TSLA -3.55%) has no true peer in the stock market.
But if you're looking for a stock that's traveled a similar path to the leading EV-maker, one good analog is Netflix (NFLX -0.51%). Yes, the video streamer operates in a different industry from Tesla, but the two companies have a number of things in common.
Both are disruptors that essentially created and now lead their respective industries, having bet big on new technologies that many thought would fail. For years, both companies were burning cash while critics jeered their business models, but today both Netflix and Tesla are highly profitable.
As stocks, they also have a number of similarities. Both have been big winners on the market. Netflix has returned 18,000% since its 2002 IPO, while Tesla stock has gained 21,000% since it went public in 2010.
However, the fortunes of the two stocks have bifurcated in recent months. Tesla delivered another spectacular earnings report last week, featuring 81% revenue growth to $18.8 billion and an operating margin of 19.2%, a level of profitability rarely seen the automotive industry.
Netflix, on the other hand, has collapsed after the company reported a surprise decline in subscribers in the first quarter and forecast a loss of another 2 million in the current quarter.
The streaming champ pointed to a number of factors that are suddenly challenging, but one seems to rise above all others: competition.
For a long time, Netflix had limited competition in the streaming arena, facing mostly just Amazon and Hulu. But over the last few years streaming has gone mainstream, with nearly every major media company entering the fray with services including Disney+, HBOMax, Apple TV+, Peacock, Paramount+, Discovery+, and others. That competition has presented cord-cutters with a smorgasbord of new options, and not surprisingly, that is making it more difficult for Netflix to add new users. Despite the company's strengths, including a massive library and a broad range of international content, streaming customers seem to like the broad selection they now have.
Image source: Tesla.
What it means for Tesla
Tesla is still facing relatively little competition in the EV space. Compared to Netflix, it's probably where the streamer was in 2018 or 2019, but competition is coming. General Motors plans to launch 30 EV models by 2025, while Ford plans to produce 2 million EVs by 2026, and nearly every major automaker is investing billions in going electric.
Competition has a tendency to bring down prices and weigh on margins, as Netflix is now experiencing. The streamer had planned to expand its operating margin by 3 percentage points a year, but now says it will maintain operating margin at 20% until it can reaccelerate revenue growth.
Though Tesla and Netflix have their similarities, the two industries have their own unique competitive dynamics. Much of Netflix's early competitive advantage stemmed from its distinction as, first, a DVD-by-mail company and then a video streamer, competing with cable and before that video stores. In the streaming business, your brand is only as strong as your latest hit or your current content slate, and the historical lack of competition has helped Netflix's content budget, now at $18 billion, to become so bloated as it's sought to maximize its content rather than optimize it.
Tesla, on the other hand, still enjoys many of the competitive advantages it's long had, including its reputation for high-performance vehicles and innovation, including features like its over-the-air software updates and autopilot. Its network of superchargers will also be hard for competitors to match, and the company has a head start in EV manufacturing and expertise.
In other words, manufacturing EVs at scale is considerably more difficult than launching a streaming service, but Netflix's implosion nonetheless represents a cautionary tale that Tesla investors should be paying attention to.
The auto industry is highly competitive and cyclical, and operating margins as high as the 19% that Tesla posted in Q1 are rare. Below are the operating margins of some top automakers over the last decade.
GM Operating Margin (TTM) data by YCharts
As you can see, it's rare for a major carmaker to top a 10% operating margin, even during an era of economic expansion. For Tesla to deliver a 19% operating margin is a testament to the company's prowess and brand strength, but it also puts an even bigger target on its back as rival carmakers see that as further incentive to invest in EVs.
There's another reason to be concerned about Tesla and the rest of EV sector. Valuations still seem bloated even as a number of EV stocks have pulled back in recent months. While Tesla's valuation be may justified for now at a price-to-earnings ratio of 90 based on this year's expected earnings, the EV sector includes companies like Rivian and Lucid Group that have barely begun production yet still are valued around roughly $30 billion, or half the value of GM or Ford.
In other words, The EV sector still looks like it's in a bubble with huge expectations embedded in the valuations of both pure-play EV companies and some traditional automakers pivoting to EVs. EVs may be moderately more expensive than internal combustion engine vehicles, but there's little reason to expect a mature EV sector to produce significantly higher profit margins than traditional autos. After all, as competition increases, profits tend to shrink.
Tesla's execution has been phenomenal thus far, and it may end up being the exception that proves the rule. But Netflix's flop is a reminder of how quickly competition can turn a sweet growth story sour.
