Following its most recent earnings report, Tesla (TSLA 4.24%) continues to ride a wave of success, but can it continue well into the future? In this video clip from "Ask Us Anything" on Motley Fool Live, recorded on April 21, Fool.com contributors Travis Hoium and Nick Rossolillo share some thoughts on why the company may not be able to live up to its mammoth valuation.
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Travis Hoium: I'll share this first. I think it's important to put into context what Tesla does and how it compares to other companies. Let's start with gross profit margin. This is unquestionable that Tesla has the best gross profit margin in the industry. There are a number of reasons for that. I think when we look back, the innovation that Tesla is really going to have brought to the market is two things.
One, they don't use third-party dealers. They basically built their entire business on breaking down that law infrastructure around the country and that continues to be the case and so instead of having this mishmash of sales points across the country, you just deal with Tesla. So it takes up a piece out and then any margin that those dealers get would now go to Tesla instead of going to the dealer. So I think that's a big advantage.
The other thing is manufacturing. I think it's clear that Tesla has done something very different in manufacturing. It may just be they came in with a fresh set of eyes in the 2000s and 2010s and we're able to not take all these legacy costs, whether that's unions or the costs that just are involved in running a plant that's maybe been around for 30 or 40 or 50 years.
So I think there's a few things that were to their advantage there. But I do want to point out that you are paying for growth. Yes, Tesla is beating earnings. The operating numbers are great. But we're not talking about apples-to-apples from a stock standpoint and so the question is from a stock standpoint, can Tesla live up to a trillion-dollar valuation?
This is where I have more questions than ever. Because Musk talked last night about they're basically at about a million vehicle run-rate today. They want to get to 20 million vehicles. Do you guys know how many vehicles are sold globally every year?
Nick Rossolillo: Almost 70 million last year.
Travis Hoium: It's about 70 million. So based on those numbers, if you believe that Tesla can make 20 million vehicles, you also believe that Tesla will sell one out of less than four cars made everywhere in the world by 2030, by the way. Because if you do a 50% growth rate of their production, that would be by 2030, they would hit a quarter of all vehicles sold. That's aggressive, to say the least.
The other thing is we've got a ton of competition coming, so I think there's a lot of questions around that. We can get into the autonomous driving and then you've got the robot. These are things that I think a lot of people are putting a lot of value on that are just complete unknowns at this point.
What we know today is that Tesla can make a lot of vehicles, can do it efficiently, can do it at a very high margin. Beyond that, does that mean that they can make a robot? I don't know. They basically failed in trying to get into solar. I think the energy storage business is fine but they're not doing anything that a dozen other companies aren't doing.
To me that's really the question, that's why there's fear. It's not that the company will perform poorly, it's that the company won't live up to those expectations that the market has put on it with a trillion dollar market cap.