Tesla's market cap tops the 9 largest automakers combined — Experts disagree about if that can last

Published Mon, Dec 14 20203:08 PM ESTUpdated Mon, Dec 14 20204:17 PM EST

Key Points

Tesla's market cap has increased by more than $500 billion in 2020, and is now worth as much as the combined market cap of the nine largest car companies globally.
Despite the meteoric growth for Tesla's market value this year, many shareholders and fans of Elon Musk believe there's even more upside for the electric vehicle maker heading into 2021.
Some Wall Street analysts are issuing warnings on Tesla, however, signaling that shares in the company may be headed for a decline once it is added to the S&P 500 index on December 21, 2020.

Tesla's market capitalization has increased by more than $500 billion in 2020, and the company is now worth about as much as that of the nine largest car companies globally, despite selling a small fraction of the volume of cars that they do. Those automakers include Volkswagen , Toyota , Nissan , Hyundai , GM , Ford , Honda , Fiat Chrysler and Peugeot . Overall, Tesla expects to sell at least 500,000 electric vehicles this year worldwide, making up less than 1% of total vehicle sales. By way of comparison, Cox Automotive forecasts that total car sales in the U.S. alone should reach at least 14.3 million in 2020, down from 17 million or more in each of the past five years. The rally this year was driven in no small part by Tesla's cult-like following of retail shareholders. Tesla's rapid and successful expansion in China, and the announcement that Tesla will be included in the S & P 500 on Dec. 21 helped sustain Tesla's growth narrative. So did announcements about Tesla's plans to manufacture its own proprietary battery cells, and to roll out new features for their Autopilot and Full Self Driving partially automated driving systems. According to analysis by JL Warren Capital, an equity research firm focused on Chinese companies and multinationals in China, new energy vehicles now make up about 6% of passenger car sales in China, with about 963,000 units sold there in the first 11 months of 2020 out of 17.5 million total. Tesla commanded around 12% market share for the category from January through the end of November, ranking only behind domestic automakers BYD and SAIC. That's no small feat for a high-priced if high tech brand. Chinese car buyers are very price sensitive, explained JL Warren Founder and CEO Junheng Li. Tesla is also a low-float stock, which can contribute to upside volatility. According to data compiled by FactSet, company insiders owned just over 20% of Tesla shares — with Musk individually owning about 18% of the company as of the end of September. (He has amassed more shares since then and will continue to do so as he earns out tranches of his massive CEO pay package .) Institutional shareholders owned around 42% of Tesla's stock during the period ending September 30, 2020, and the top three institutional shareholders included Capital Research & Management Co., The Vanguard Group and Baillie Gifford. All reduced their position in Tesla during the third quarter. Despite the meteoric growth for Tesla's stock this year, many on Wall Street believe there is even further upside for Tesla heading into 2021. For example, CFRA Research analyst Garrett Nelson recently raised Tesla's 12-month price target by $100 to $750 and reiterated a "strong buy" following the automaker disclosing plans for a capital raise of up to $5 billion at the market price. But other analysts are issuing warnings on the stock, suggesting Tesla's market value is based more on the company's technological goals and forward-looking statements than it is on likely profits and demand for Tesla's electric vehicles, premium services and software upgrades for these, and solar and energy storage products. "We recommend investors not weight Tesla shares in their portfolio in equal proportion to the S & P because Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so," J.P. Morgan analyst Ryan Brinkman said in an investor note Wednesday. On Friday, Jeffries analyst Philippe Houchois quixotically downgraded his rating on Tesla shares to "hold" from "buy" but raised his price target to $650 saying the company has a "durable competitive edge," but "We don't believe Tesla can dominate autos given industry structure and politics." Here's an overview of some common arguments for and against Tesla's high valuation. EV/EBITDA Tesla's enterprise value is currently around 180 times more than its earnings before interest, taxes, depreciation and amortization, or EBITDA, according to FactSet. Its five-year multiple average is 151.8 – with a range of between 23.2 and 420. That compares to Toyota , which Tesla surpassed in market value in July, with a current multiple of 12.5 and a five-year average of 8.1. America's largest automaker, General Motors , has a current multiple of 8.7. Even tech companies such as Apple (26.7) and Google (23.4) are significantly below Tesla. The bull case: Tesla has disrupted the traditional automotive industry by proving pure battery electric vehicles can be more than compliance cars, pushing competitors such as GM to move faster into the segment. The company will continue to grow sales and earnings as it expands globally and domestically. As it releases new products, like the completed version of its Full Self-Driving software, its own form of auto insurance, the Tesla Cybertruck and next-generation Roadster, it will sell more services and cars to existing customers, while winning over new ones. Tesla's shareholders remain enthralled with the vision of CEO Elon Musk, and trust him and the company to deliver on promises, eventually. They don't mind if it takes a bit longer than Musk originally hoped to turn products from prototype into reality, whether that's Solarglass rooftop panels or electric vehicles that can operate as self-driving robotaxis. As long as Tesla has innovative ideas, it will have both legions of fans, and access to capital. Even in a pandemic year, Tesla was able to tap the markets to raise billions to build new factories, and begin to pursue its dreams of low impact lithium mining, and in-sourced battery cell production. The company has reported five consecutive quarters of profitability , despite investing to build a new plant in Shanghai, and embarking on construction of new factories in Texas and Germany, more recently. Morgan Stanley analyst Adam Jonas urged investors Thursday to "engage with their colleagues in software/tech to understand the changing business model," for the electric car company. He said such services are $164 out of his $540 target on shares of Tesla. The bear case: Tesla is unfairly grouped with technology companies rather than automakers, its market value is not connected to reality and its stock price is due for a correction, the bears say. Wall Street has ignored or failed to hold Musk accountable for persistent quality and reliability problems that have led to reputational damage to Tesla, and recalls in China and the U.S. in 2020. The company has kept sales numbers for its newest vehicle, the Model Y crossover SUV, secret so it isn't clear how whether and how much that vehicle is succeeding, and whether its sales are cannibalizing Model 3 sales. Tesla has several times promised that its fully autonomous system is close to completion, even though Musk said his Autopilot team was rewriting aspects of it this year. Sarat Sethi, a managing partner and portfolio manager at Douglas C Lane and Associates, said while he wouldn't short Tesla stock, he believes the stock will be down in 12 months and not one he'd "want to own for the next three years." "There's a lot of momentum there. They've got to do everything perfect and plus, plus. They've got to become a software company, they've got to become every type of company out there to actually discount into their valuation," he said Wednesday during CNBC's "Squawk Box." Since December 2018, analysts on average have increased their 12-month price targets by about 450% despite simultaneously lowering their estimates for Tesla EPS for 2020, 2021, 2022, 2023, and 2024, according to J.P. Morgan. Cash on hand If it's true that "cash is king," Tesla is a prince or a peasant. Tesla is far behind when compared to larger automakers and tech companies. It's one reason why the company has tapped into capital markets three times this year, including the stock sale announced Tuesday. It's something it may need to continue to do in future expansion plans. The automotive industry is extremely capital-intensive. Cash is needed to expand vehicle production as well as launch new models and enter new segments such as heavy commercial trucks, which Tesla plans to do with its semi-truck. Tesla had total assets of $45.7 billion to end the third quarter, including $14.5 billion in cash and cash equivalents. That compares to GM with total assets of $239.7 billion, including $26.9 billion in cash and cash equivalents. Apple has total assets of $317.3 billion, including more than $191.8 billion in cash and marketable securities. The bull case: Tesla is justified in spending on an aggressive domestic and global expansion to increase the company's operations. That includes ramping up production in China – the world's largest EV market – and building new vehicle assembly plants in Texas and Germany. Largely driven by regulations, Europe and China are expected to adopt electric vehicles faster than the U.S. But electric pickups, which Tesla plans to build in Texas (alongside its Model Y crossover SUV) remain an untapped growth market for the company. Tapping into capital markets is a smart thing for the company to do following the meteoric rise of the company's stock in 2020, and Tesla will have access to the capital it needs for the foreseeable future. Wedbush analyst Dan Ives said in a note Tuesday the capital raise is a "clear positive and further solidifies" the bull case for Tesla. "Now in a clear position of strength and out of the red ink with major factory build outs on the horizon (Austin and Berlin), Musk and his red cape are raising enough capital to get the balance sheet and capital structure to further firm up its growing cash position and slowly get out of its debt situation, which throws the lingering bear thesis for Tesla out the window for now," he wrote. The bear case: Tesla has never proven it can sustain operations profitably, and will need to continue to tap into the financial markets to pay off its debts and assist in its global expansion. As of September, Tesla was among the worst-rated companies when it comes to financial stress and commercial credit scores, according to Dun & Bradstreet. That means it isn't paying vendors, or isn't paying them on time, most of the time. Tesla informed investors in October that it plans to ramp up spending to $2.5 billion in 2021 and 2022, especially on new factories and expansion, including battery cell manufacturing. But a significant portion of that may have to cover old debts, and possibly the costs of recalls, lawsuits and settlements that are piling up for the EV maker as it ages. Hedge fund manager Michael Burry, whose bet against the housing market during the Great Recession was made famous in "The Big Short," reportedly urged Musk last week via a since-deleted tweet to issue more shares at their "ridiculous" levels. He said he's short Tesla. Vehicle deliveries Tesla's vehicle deliveries grew in 2020, but the company's vehicles make up less than 1% of vehicle sales in both the U.S. and globally. At Tesla's 2020 annual shareholder meeting and battery day presentation in September, Musk said that vehicle deliveries in this year would be up 30% to 40% from last year, implying a range from 477,750 to 514,500 deliveries total. That compares to wholesale shipments through the first three quarters of the year of 2.4 million for GM, including 1.9 million in North America. Musk has highly ambitious plans to increase Tesla's vehicle sales volume from about 500,000 in 2020 to 20 million annually over the next decade. The bull case: Tesla accounts for roughly roughly 3 out of every 4 EVs sold in the U.S., giving Tesla a first-mover advantage over legacy automakers such as GM entering the growing EV market. It also operates its own EV charging infrastructure across the nation, a competitive advantage. The company has created a cult-like fanbase for its vehicles through grassroots marketing, events and aggressive use of social media that will continue to keep them buying into Tesla and believing in Musk. Tesla has pioneered over-the-air software updates , which make customers feel their cars get better, not worse over time. Its technology is leaps and bounds ahead of other EV makers, including big OEMs like GM, Toyota and Volkswagen and upstarts like Nio. Goldman analyst Mark Delaney said in an investor note last week that if Tesla sustains a mid to high 20% range share of the EV market, then it could reach 15 million units by 2040. The bear case: Tesla's vehicle deliveries and sales are a small amount of the overall automotive industry. As additional automakers enter the market, the company will become more of a niche player of a small segment of the automotive industry. Some are already challenging Tesla's dominance, especially in Europe, where Volkswagen's ID.3 has proven popular. As Tesla tries to expand into a more price-sensitive part of the market, customers will not tolerate the electric vehicle maker's quality and reliability issues. Tesla has essentially had the luxury U.S. electric vehicle market to itself, but that's slowly changing as new startups and legacy automakers release EVs to actually compete against the company. For example, GM has announced plans to invest $27 billion in EVs and autonomous vehicles by 2025. That includes releasing 30 new EVs globally, including the Hummer EV pickup next year, which was designed to compete against the Cybertruck. Consumer Reports only recommends one of the four models Tesla makes today, and JD Power, in June 2020, gave Tesla vehicles the lowest ranking of 32 major brands it evaluated in its annual quality study. IHS Markit forecasts EV sales will only be 10.2%, or 9.4 million, of the nearly 92.3 million vehicles globally in 2024. Tesla shares were up 4% to $636.30 on Monday. – CNBC's Michael Bloom contributed to this report.