Elon Musk is known for his optimism. And, much of the time, there seems to be merit to his rosy outlook. After all, he helped a number of companies rise to multibillion-dollar valuations: PayPal, Tesla Motors (NASDAQ:TSLA), SpaceX, and SolarCity. While PayPal may be old news, his more recent feats of carving out a niche in the capital-intensive auto industry, building reusable rockets, and getting solar power systems to a point where they make sense for many residential buyers are not just impressive -- they're mind-boggling. So if there is anyone who is likely to live up to an optimistic outlook, it's probably Musk. But despite his track record in accomplishing what seems impossible in very short time frames, investors should take his latest prediction with a grain of salt.
Elon Musk drops a bombshell
Perhaps he was a bit too fired up from launching a rocket into space just an hour before he switched gears from SpaceX CEO to Tesla CEO and tuned into the electric-car maker's earnings call. Whatever it was, Musk definitely was on a whole different level when, about 15 minutes into the call, he laid out his prediction for Tesla's valuation over the next 10 years.
"I emphasize these are just certain assumptions," Musk warned, making sure the comment he was about to make wasn't translated as an official outlook from the company. "I'm not saying they're true or that they will occur, but I bet that they do occur, personally. So, it's just my personal opinion."
With this caveat behind him, he laid out perhaps one of the boldest statements he has ever made about Tesla.
"If you take this year's revenue, around $6 billion or thereabouts, and if we're able to maintain a 50% growth rate for 10 years, and achieve a 10% profitability number, and have a 20 P/E, our market cap would be basically the same as Apple's is today," Musk said.
Checking his math, and assuming that the "10% profitability number" he was referring to was net margin, it seems Musk's assumptions do add up. Tesla would have a market capitalization of $692 billion, just shy of Apple's $725 billion market cap today. Tesla's market cap would be up about 25 times today's $26.9 billion level.
Musk's comments came after a question from an analyst about how investors should think about the trajectory of the company's spending on capital expenditures going forward. After laying out his incredible outlook, Musk returned to the question: "Obviously, getting there will require some significant capex." His reference earlier in the call to Tesla's plans for "staggering" spending on capex is probably more appropriate in light of his prediction for a $700 billion market cap in 10 years.
Sweet and sour implications
Investors shouldn't fault Musk for dreaming big. Obviously, doing so has worked out very well for him. And who knows? Maybe Tesla's growth will truly astound us all over the next 10 years. But counting on such an optimistic outlook would be a mistake.
There's no way around the fact that Tesla is a small player in a land of much larger, established automakers. Furthermore, while Tesla's focused bet on fully electric makes huge success more likely if fully electric cars eventually become the majority, it also sets the company up for tough times if other technologies for transportation end up to be tougher competition than Musk imagines.
Still, as a Tesla shareholder, I'm OK with Musk occasionally saying things that sound out of this world. Musk's ambition is probably Tesla's most valuable asset. But do I believe Tesla will be a $700 billion company in 10 years? No. If I end up being wrong, I'd rather error on the side of caution than overoptimism.