
Why Tesla Is Worth More Than GM - havella
https://www.technologyreview.com/s/607954/why-tesla-is-worth-more-than-gm/
======
tuna-piano
It is just not true that Tesla is worth more than GM in the common
understanding of that. The real answer to "Why Tesla is Worth More Than GM" is
one sentence: GM has more debt than Tesla.

People understand (and the article gives reasons why) "worth more than" to be
that the GM brands + factories + assets + future prospects are worth less than
Tesla brands + Tesla factories + Tesla assets + Tesla future prospects. But
this is not true in actuality. This is because Tesla is worth more than GM
based on Market Capitalization, not Enterprise Value. The difference between
these companies is that GM has $51B in net debt while Tesla has $2.6b.

If GM wanted to be "worth more than Tesla" (using market cap), they could do
it tomorrow by issuing $51B in new stock and paying off their debt. Why
doesn't GM do this? Because they actually believe their stock is undervalued,
and would rather buy their own stock than sell it.

Debt (leverage) is different across different companies. If you aren't
familiar with how different debt levels affect the market cap, the following
pages are worth a read:

[https://medium.com/@ruzbehb/tesla-is-not-valued-at-more-
than...](https://medium.com/@ruzbehb/tesla-is-not-valued-at-more-than-general-
motors-and-ford-hint-enterprise-value-c89c2d21222e)

[http://www.investopedia.com/exam-guide/cfa-
level-1/corporate...](http://www.investopedia.com/exam-guide/cfa-
level-1/corporate-finance/debt-effects-capital-structure.asp)

[http://www.investopedia.com/terms/l/leverage.asp](http://www.investopedia.com/terms/l/leverage.asp)

~~~
adventured
Your premise is entirely wrong.

GM has _positive_ $37 billion in net tangible assets. That has climbed from
$27b, to $33.9b, to $37b over the last three fiscal years. Their net balance
sheet is not only improving, it's dramatically in the positive.

To go with that, they have $24 billion in cash and are currently capable of
earning around $12 billion in net income on an annualized basis (meaning they
can easily afford the debt they have just on an income basis).

GM's balance sheet is in dramatically better shape compared to market
capitalization vs Tesla. To make matters worse for Tesla, they're still
bleeding immense red ink vs sales, having to regularly either raise debt or
dilute shareholders to keep operating (GM doesn't have that problem, and
doesn't need to eat its balance sheet to operate). That by itself tells you
everything you need to know about Tesla vs GM when it comes to balance sheet
vs market cap.

Tesla is worth more than GM for one reason: the potential to one day be more
profitable than GM, namely that enough shareholders are buying into that
premise.

~~~
tuna-piano
You may know much more about this than me.

Is Enterprise Value too simple a calculation to compare the companies? (you
seem to be looking at the entire balance sheet, not just cash/debt)

Certainly GM could issue stock tomorrow to increase their market cap to be
more than Tesla's?

Market cap just seems a bit arbitrary of a metric (as it doesn't take into
account cap structure) when you're comparing the value of the digital economy
and digital monopolies, etc (as the article does).

~~~
tuna-piano
@adventured

But certainly if the GM entity had $10B more cash tomorrow, it might not be
worth $10B more, but certainly it would be worth $5-$10B more (or at the very
least >0 more)?

And of course, they could use that $10B to pay off $10B of their existing debt
as well.

All I'm trying to say is that you probably shouldn't compare market caps of
companies with vastly different capitalization structures to try and deduce a
bigger picture idea of the economy. You should look at enterprise value.

[http://www.investopedia.com/terms/m/marketcapitalization.asp](http://www.investopedia.com/terms/m/marketcapitalization.asp)

[http://www.investopedia.com/terms/e/enterprisevalue.asp](http://www.investopedia.com/terms/e/enterprisevalue.asp)

~~~
adventured
> But certainly if the GM entity had $10B more cash tomorrow, it might not be
> worth $10B more, but certainly it would be worth $5-$10B more (or at the
> very least >0 more)?

No, again, that's not how it works. Shareholders value companies primarily
based on a multiple of earnings with an overwhelming tilt toward future
expectations, not based on cash. Cash can receive anywhere from a medium to a
near-total discount, depending on the context & company. As an easy example:
Apple's cash has stopped growing at the rate it used to (they're paying a lot
of it out), while it has taken on immense debt in a short time, and its
earnings have not expanded in years (in fact they've fallen as with sales, re
fiscal 2016 vs fiscal 2015) - meanwhile, its stock has been given an increased
multiple lately, AAPL is up 47% (adding $200+ billion in market cap, while
earnings went down and debt went up) in the last year despite those
theoretical negatives. Why? Shareholders mostly don't care about the
accumulated debt or the slowdown in cash accumulation.

There are a few exceptions, for example if a company is under serious
bankruptcy risk. That can dramatically damage the valuation given to a company
via its income. In that specific case, adding a ton of cash to relieve the
bankruptcy risk, can produce a greater than 1x release in value as
shareholders shift back to operating fundamentals & future expectations.
Valeant Pharmaceuticals is a walking example of that right now. To the extent
Valeant manages to lift the dark cloud of bankruptcy off of it, their market
valuation will rise (every time they announce they've paid down some debt, or
sell an asset for a good price, their stock tends to spike; they have
something like $29b in long-term debt and the debt interest is threatening
their existence; if they magically added $10 billion in cash tomorrow, their
market cap would expand by something near a 1 to 1 basis or likely greater
(depending on the bankruptcy pressure, relief from it can generate an
amplified upside)). Another exception example: Las Vegas Sands (LVS), the
casino giant, was under serious risk of bankruptcy during the economic crash
in 2009; its founder, Sheldon Adelson, decided to back the company with a
large amount of money, the stock proceeded to increase by 5x to 6x in a matter
of a few months afterward, due to the relief that bankruptcy was no longer
nearly so likely (shareholders shifted back to valuing the company on its
future earnings/growth/operating expectations). LVS gained so much so quickly,
because the risk of bankruptcy was viewed as being so severe it had
drastically depressed the market cap of the company.

~~~
tuna-piano
Certainly if there were two identical companies, and one had $10B more in
cash, the one with $10B more in cash would be worth more than the other
company? I understand it's not 1-1.

I'm thinking completely theoretically, so if the world doesn't work like
finance theory, fine. But I just can't see any way in which leverage, debt,
cash, etc don't substantially alter the market cap of a company.

~~~
nbouscal
adventured is having a really hard time with your phrase "two identical
companies". The answer to your question is yes, if you had two identical
companies and then gave one of them $10B in cash, that company would be worth
$10B more.

~~~
kgwgk
Actually adventured is right on non-operating cash being usually discounted.
In general the second company will not be valued at $10bn more than the first.

Would you rather have a $1 in cash and a $9 share in the first company, or a
$10 share in the second company where $1 is the cash per share? The second
case is more risky so you wouldn't pay the full extra $1 for the second share.

Of course it could also be the case that the spread is larger than $1, if the
first company is too short on cash and there is a liquidity risk depressing
the valuation.

~~~
nbouscal
> The second case is more risky

Not if they're otherwise identical companies, it isn't. There may be reasons
to expect a correlation between risk and cash holdings, or something to that
effect, but ultimately a share in a company is a share of ownership of that
company's assets. If a company didn't become $10B more valuable when given
$10B in cash, where exactly did that value disappear to? Value doesn't vanish
into thin air simply because it's now owned by a company.

~~~
kgwgk
Your loss is limited to $9 in the first case, but you can lose $10 in the
second case. If you think this is not more risky, fine.

------
phkahler
Nothing to see here. The only thing the author actually says about Tesla is
that they collect a lot of data from their cars. The only thing he indicates
that may be useful for is self driving. Most of the text is just rambling
about how awesome tech companies are and he obviously he doesn't consider GM
or anyone in the auto industry to be a tech company either.

Really almost a content-free piece with respect to the headline.

------
hodder
Tesla is worth more than GM largely due to speculation that Tesla will be able
to ramp up revenues, margins and cash flows unbelievably quickly and expand
far beyond a car company. Whether or not they have any chance of doing this is
unknown, but the market is a huge fan of Elon Musk given his history of
delivering innovation.

Historically, betting on immense multiples of revenue and earnings on negative
cash flow companies has not worked out on average, but Tesla may not be
average.

Regardless, I wouldnt invest in either company. Autos have historically been a
terrible investment due to large capital requirements, low margins, a cyclical
operating cycle, ugly pension requirements, and fairly expensive labor... We
shall see what the future brings.

------
11thEarlOfMar
A minor point, but "...because of things like online shopping, which has put
hundreds of thousands of retail workers out of a job."

Makes me wonder... the method of product selection and delivery have changed
from in store browsing and carry out, to online browsing and delivery. Instead
of sales personnel and cashiers, it involves warehousing (to a larger degree)
and delivery vehicles. Employment in sales/cashiers therefore would drop,
while employment in warehouses and delivery companies would have increased.

What are the relative ratios? For every x retail jobs lost, how many y
'logistics' jobs are created? Once automatic warehouses and autonomous
vehicles are pervasive, is it a 100% loss?

~~~
Dolores12
Employment in warehouses stays unchanged, because people are not buying more.
They don't have more money to spend just by switching to online browsing.

~~~
11thEarlOfMar
I'm not sure this is true. Online prices tend to be lower than in store. So
the cost of goods overall is lower and consumers effectively can buy more
items.

Also, when considering retail, the shipments from warehouse to store are in
bulk, whereas shipments direct to consumer are small numbers of discrete
items, which requires more handling for picking, packing and shipping.

------
zeteo
> How did we end up with a digital economy dominated by a few big players? The
> simplest explanation focuses on what are called network effects

The simplest explanation is that antitrust enforcement started to lag in the
'80s and became seriously deficient after 2000. Electricity, oil, telephony
also had network effects.

------
cs702
This reminds me of the many reasonable-sounding articles in the late 1990's
that rationalized the sky-high valuations of dot-coms. For example:

[https://www.theatlantic.com/magazine/archive/1999/09/dow-36-...](https://www.theatlantic.com/magazine/archive/1999/09/dow-36-000/306249/)

[https://hbr.org/1999/11/the-new-economy-is-stronger-than-
you...](https://hbr.org/1999/11/the-new-economy-is-stronger-than-you-think)

A few months after these articles were published, the stock market crashed...
and it took the better part of two decades to recover.

------
neolefty
> What’s more, where GM’s production led to eight jobs in its supply chain for
> every one person it employed directly, the ripple effects of the Big Five’s
> businesses, with the exception of Apple, are much smaller.

Would Amazon's ripple effect be pretty big too? All the products it sells have
manufacturers (who have employees). Or is it better described by
disintermediation, where a product that is sold via Amazon now would have been
sold via brick & mortar before?

~~~
Tloewald
I think you've mostly answered your own question.

To some extent, Amazon presumably creates new sales (and hence new jobs in
production) but this is almost certainly offset by the jobs it destroys
(middlemen of various kinds).

AWS might have greater ripple effects (enabling new tech companies) but they
themselves aren't large employers.

------
heisenbit
It remains to be seen whether Tesla will be able to sustain the success in
cars. I'm more optimistic in the rocket business as the competition is
limited. The automobile business is complex and scaling out their operation is
going to be hard. Tesla's competitors have scale, suppliers who also invest
and broad customer brand acceptance. They also have woken up.

China will soon provide battery capacity for cars in excess of what Tesla is
producing. Autonomous driving on a broad basis requires a regulatory framework
and that may well take time to emerge until there are other brands. The
horizontal structure of the conventional car industry makes it likely that
alternatives to Teslas autonomous drive will quickly spread across the
traditional car companies.

Tesla may well build the best electric car for a long while but volume upside
may be limited.

------
bbayles
Conflating market cap and total worth is a pet peeve of mine.

Market cap is "price of _one_ share" multiplied by the total number of shares
outstanding.

If you want to buy a small number of shares, you can probably just multiply to
find the total price you would pay.

If you want to buy a large number of shares, or the whole company, you can't
just multiply. You would need to get the current owners to sell to you, and
they might either charge you a premium or refuse to sell. The total worth of a
company depends on the distribution and type of ownership (among many other
things).

Market cap is a fine shorthand, but serious analysis about comparing worth
should control for several other things.

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skywhopper
1) Because investors with too much money in their pockets believe the self-
driving hype.

2) Because GM (and Ford and Chrysler) has a lot more unknowns and risks given
its increasingly outdated dealer-based sales channel, along with decades of
pension liabilities, and is ultimately in a precarious situation, see: the
near collapse of the US auto industry in 2008.

3) Maybe most importantly, investors believe that ultimately Tesla will be
purchased by a big tech company with money to burn (or by a traditional
automaker in full panic mode). Apple could pay _cash_ for all of Tesla's
outstanding stock and still have the biggest cash stockpile of any corporation
in the world.

~~~
greenyoda
" _Apple could pay _cash_ for all of Tesla 's outstanding stock and still have
the biggest cash stockpile of any corporation in the world._"

Apple doesn't even want to be in the business of manufacturing iPhones - they
outsource it to Foxconn. So why would they suddenly be interested in owning
Tesla's huge car and battery manufacturing factories that employ thousands of
workers?

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Theodores
There are as many reasons as there are investors. Apart from financial
returns, not everyone is in it for the same thing.

My reason for giving Tesla a higher valuation is different to the next guy.
However, Tesla is a better starting point for capitalising on a low carbon
future. Even the GM pension obligations factor into my hunch. Ultimately it is
all about belief, in my case a belief in a zero carbon future.

------
nbouscal
> The digital economy is giving us a world in which the benefits are
> concentrated among consumers and the Big Five who serve them. Everyone else
> just lives in it.

This is a really weird phrase. "Concentrated among consumers"? More than 80%
of Americans use the internet, not exactly "concentrated".

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synaesthesisx
Apples to oranges. GM is a car company, while Tesla is an energy company.

