Tesla Motor Inc. Vs. Volkswagen AG

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Rakesh Rana's picture

Summary:

Tesla Motor Inc. have been an innovative company that pioneered the luxury electric vehicle market, while Volkswagen AG is one of the leading brands and biggest auto-manufacturer. The current price of Tesla reflects very high market expectations which would be difficult for it to deliver given its niece segment (electric vehicles) already have strong competing product offerings from multitude of traditional automotive companies. Volkswagen price on the other hand is attractively priced considering its strong worldwide market position and consistent track record of high sales and profitability. Based on comparison of two companies’ financials, strategic orientation and future potential – the recommended rating for Tesla Motors is Underperform, while Volkswagen AG is expected to Outperform.

1.     Brief Overview

Tesla Motor Inc. (TM) is a pioneer electric car company; founded in 2003 the company is known widely for introducing its innovative fully electric vehicle in the market. In 2014 the company sold just over 30,000 units [1] and is yet to report a substantial profit. The high current share price USD 191 [2] mainly reflect shareholders expectation that the company can drive disruptive changes in automotive industry and make significant profits in future.

Volkswagen AG (VW), on the other hand is one of the world’s largest automaker with sales of about 10 million units [4] and 202.5bn EUR in revenues (2014) [5]. The Group is made up of twelve distinct brands, employs nearly 600,000 people, operates 118 production plants in 20 European countries and a further 11 in countries across Americas, Asia and Africa [6].

2.     Comparison in Numbers

In terms of financials, TM and VW are completely different entities. On one side, TM is a start-up with only 12 years in market and sales of only 3.2 billion USD, while on other is one of the world leading automotive manufacturer with over 2 billion Euros in sales. Net sales, gross and net profit as percent of sales is compared in table below.

As expected from a new market entrant, TM has increased its sales and over time managed to close in on its negative net income, still as of 2014 net income is negative and lower compared to a year before.

On the contrary despite the huge size of VW, what is interesting to note is that the company has managed to deliver sales growth almost consistently over the last decade. The company has also delivered high gross and net profit over the period (except in 2009 due to financial crisis and in 2013). Thus VW has performed very well for its size and maturity, while TM is yet to prove that it can deliver in accordance to the high expectation of its shareholders.

3.     SWOT Analysis Comparison

Comparing TM and VW on standard SWOT parameters, we see

Tesla Motor Inc.

While TM has significant strength with respect to its brand and market perception of an innovative company, the company also has major threats in terms of competitive products and any potential issues with safety that can cause a major negative impact on its brand image.

Volkswagen AG

 

 

VW main strength comes from its global reach and particularly strong presence in emerging markets where TM is yet to show any significant sales. The Volkswagen Group has also implemented MQB platform (Modular Toolkit Strategy [11]) as company's strategy for shared modular construction [12]. The strategy is producing and expected to further enhance the profitability by allowing use of core "matrix" of components across wide variety of platforms.

VW is also in a better position through its command over 12 distinct brands with high market value, recognition and operations not only in passenger cars, but also in busses, trucks and motorbikes.

4.     Valuation

Consensus estimates from equity analysts suggest that both TM and VW are viewed positively, still larger proportion of analysts have buy ratings for VW than for TM.

12 months forecast

Potential up/down side

 

 

The 12 months price target summarizes the analysts warranted price potential up/down side. While TM is expected to provide an upside of over +100% in an optimistic scenario, the pessimistic valuation can deliver -66%.

It can be safely concluded that TM is seen as high risk stock compared to VW which is expected to deliver decent return on investment over next 12 months.

Long term fundamental valuation

Using valuation that is grounded in fundamental values (using CFROI, Cash Flow Based Return On Investment) using Credit Suisse Holt Valuation Methodology – the five year forecast revels a downside of -63% for TM, while an upside of +77% for VW.

5.     Tesla: is it the next big thing?

Does Tesla justify it current high valuation?

Looking at current high stock price of TM despite its very low market performance points to shareholder expectations that is in comparison to valuation of Facebook Inc. in 2010 with 608 million users worldwide [15] and much higher than valuation of Apple Inc. in 2004 approximately 4 years after Steve Jobs returned as CEO and 3 years after the release of iPod.

It would be very difficult to for TM to deliver sales or profit growth as provided by Facebook beyond 2010 due to inherently different business segment.

The Right Case Study: Toyota Prius

 

Introducing a car model in world stage with new (better than market) technology is closer to what was seen with introduction of Prius by Toyota in 1997.

Despite Toyota’s leading position in the automotive market, it did not provide any substantial market share or profitability to the company compared to its competitor (VW) which outperformed it.

TM is also likely to have similar future with good sales over time but low probability than that required to meet the expectation reflected in its current share price.

Competition to Tesla EVs

 

 

Tesla is already facing stringent completion in the niece segment it has decided to compete. A number of models form traditional manufacturers now provide viable alternative to current Tesla models in market.

The competitors are also very much expected to introduce EVs and Plug-in hybrids at mid-price segment (30-40K USD), where Tesla Model 3 is expected to compete.

Thus while TM is riding high expectation from its first proposed mass produced 200-mile EV, the ride for TM will not be as easy as it projects it to be.

 

6. Tesla: the final reasons for why it’s not a great buy

Sector growth driver: automotive sales (worldwide)

The sales of passenger cars worldwide is increasing which is good news for the automotive sector. But most of the growth in the sector is attributed to increasing demand from the emerging markets particularly Asian countries such as China and India. 

While VW has strong presence in such markets, TM brand and product offering are not yet well placed for such markets.

 

The current high price of TM

TM is already priced very high; the company will have to deliver strong sales, growth and profitability in years to come to even justify its current valuation. If or not TM will be able to deliver on these high expectations is yet to be seen, VW on the other hand has consistently proven record of high sales, profitability and is well placed in terms of its market position, strategy and product offerings.

The most likely TM share return forecast

 

 

Most past and current target price and outperform ratings for TM underline highly optimistic scenarios where TM can somehow transform the automotive market and drive immense sales and profitability.

But given the non-agility of automotive sector, no distinct technological advantage or economies of scale for TM and also likely new competition from likes of Google Inc. and Apple Inc. will very likely keep TM as a niece player not justifying its current high valuation.

Conclusion:

Tesla Motor Inc. is Over-Priced and most likely will Under-Perform; Recommendation: Sell

Volkswagen AG is Under-Priced and is most likely to Out-Perform; Recommendation: Buy

 

References: 

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[11]      H. P. Pötsch, “Volkswagen – Driving Forward.” [Online]. Available: http://www.volkswagenag.com/content/vwcorp/info_center/de/talks_and_pres....

[12]      “Volkswagen Group MQB platform,” Wikipedia, the free encyclopedia. 19-Mar-2015.

[13]      FT.com, “Tesla Motors Inc.” [Online]. Available: http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=TSLA:NSQ.

[14]     FT.com, “Volkswagen AG.” [Online]. Available: http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=VOW3:GER.

[15]      A. Sedghi, “Facebook: 10 years of social networking, in numbers,” the Guardian. [Online]. Available: http://www.theguardian.com/news/datablog/2014/feb/04/facebook-in-numbers.... [Accessed: 05-Apr-2015].

[16]     Toyota, “Toyota hybrid cars global sales.” [Online]. Available: http://newsroom.toyota.co.jp/jp/detail/4061096/.

[17]      “Toyota Prius,” Wikipedia, the free encyclopedia. 30-Mar-2015.

[18]     Yahoo.com, “Yahoo Finance, market data.” [Online]. Available: http://finance.yahoo.com/market-overview/.

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[21]      D. Galves, S. Patil, and T. Chauhan, “Credit Suisse Equity Research:Tesla Motors Inc.,” 02 April 2015.