Elon Musk, founder of SpaceX and chief executive officer of Tesla Inc., arrives at the Axel Springer Award ceremony in Berlin, Germany, on Tuesday, Dec. 1, 2020.
Johannessen-Koppitz | Bloomberg | Getty Images
Don’t count Elon Musk among the investors who think Tesla is overvalued, even with the stock up almost 700% in the past year and the company valued at 213 times projected 2021 earnings, according to FactSet.
In the car maker’s fourth-quarter earnings call on Wednesday, Tesla’s CEO said there is a “roadmap to potentially justify” its market cap, which has topped $800 billion, making it the fifth-most valuable U.S. company. Musk is now the world’s wealthiest person, with a net worth over $200 billion.
Musk’s valuation math goes like this: Assume the company soon reaches $50 billion to $60 billion in annual car sales (the company generated $9.31 billion in automotive revenue in Q4 and said that vehicle deliveries would increase an average of 50% a year going forward). As Tesla’s self-driving technology continues to improve, those vehicles will become self-driving robotaxis, allowing usage to go from 12 hours a week to 60 hours a week. Tesla could charge additional fees for those robotaxis, allowing the company to generate much more revenue per car. Basically, it would be like bringing software economics to the manufacturing-intensive car business.
Musk also announced that Tesla’s Full Self Driving package will be available on a subscription basis starting in Q1, rather than as a one-time $10,000 add-on, which will allow Tesla to begin adding recurring revenue as it works on improving its self-driving technology.
Even if usage only doubles, a $1 trillion valuation can make sense, according to Musk.
“If you made $50 billion worth of cars, it would be like having $50 billion of incremental profit, basically because it’s just software,” Musk said in the introductory part of the call. Based on that formula, Musk says a multiple of 20 times earnings would lead to $1 trillion in market cap — “and the company’s still in high-growth mode.”
Less than nine months ago, Musk had a very different perspective on the company’s valuation. In a tweet on May 1, he said “Tesla stock price is too high,” a comment that sent the shares down 10%. Since then, the company’s market cap has jumped by more than 450%.
It’s possible that investors are already presuming Tesla’s cars will eventually turn into revenue-generating robotaxis. But the company isn’t close to having those capabilities yet, and Musk has a history of over-promising when it comes to technological innovation.
For instance, when Tesla began to discuss self-driving technology in 2016, Musk said the company would complete a hands-free trip across the U.S. by late 2017. The company has yet to complete that mission.
Currently, Tesla’s Full Self Driving features include Smart Summon, which lets a driver call their…
Read More: Elon Musk explains how self-driving robotaxis justify Tesla valuation