On today’s episode we are going to discuss the news that Tesla is now worth over $500 billion! This is considerably more than any other car manufacturer! Is Tesla really worth $500 billion? Why has the company’s value increased so much over the last year? How can a company that produces few cars be worth more than many of its competitors combined?
Gruelling (adj) – extremely tiring and difficult, and demanding great effort and determination
Runners are taking part in a gruelling 100-mile race in the mountains
Value (n) – the amount of money that can be received for something. Also included in this episode are the verb ‘to value’ (meaning to give a judgement about how much money something should be sold for) and the noun ‘valuation’ (which is the act of saying how much something is worth)
The value of the pound fell against other currencies
Profitable (adj) – making or likely to make a profit
Over the years it has developed into a highly profitable business
Quarterly (adj,adv) – done or produced four times a year
The magazine will be produced quarterly
Consecutive (adj) – following one after another without interruption
We’ve had five consecutive days of rain
-fold (suffix) – multiplied by the stated number – if i start with $5, then it increases threefold, i now have $15!
In the last 50 years, there has been a 33-fold increase in the amount of chemicals used in farming
To deem (v) – to consider or judge something in a particular way
The area has now been deemed safe
Consistently (adv) – in a way that does not change
The president has consistently denied the rumours
To fluctuate (v) – to change, especially continuously and between one level or thing and another
Vegetable prices fluctuate according to the season
Irrational (adj) – not using reason or clear thinking
It’s totally irrational, but i’m frightened of mice
2020 has been a gruelling year for many of the world’s major businesses. Changing shopping and working habits, store closures, and the almost complete stoppage of international tourism has hurt even the largest companies. One exception is electric car manufacturer Tesla. At the beginning of 2020, Tesla was valued by the stock market at around $80bn, which according to many sceptics was far too high for a barely profitable business. Over the year, however, the value of Tesla shares has continued to rise to over $500 billion. A quick google search will reveal articles from the BBC, Business Insider, Wired, amongst others questioning whether Tesla is really worth such a high valuation. If you look a little closer at these articles, you’ll actually notice that some were written in January 2020 when Tesla hit $100 billion, while others are from July 2020 at the time Tesla passed $300 billion. Why is Tesla’s value increasing so rapidly, and is it really worth $500 billion?
The value of Tesla has increased by 550% in one year; shares that were trading for $86 each in early January are now worth almost $550, and perhaps even higher when you are listening to this episode! The company managed to reach $500 billion market value after news broke that it was going to be included in the S&P 500 index of leading companies. The S&P Index measures the performance of 500 large companies listed on stock exchanges in the United States; including Apple, Microsoft, and Amazon. Let’s think about that $500 billion valuation. That is more than most of the world’s major vehicle manufacturers. So Tesla is worth more than Toyota, Volkswagen, Hyundai, General Motors and Ford. In fact, if you combined Toyota, Volkswagen, Hyundai, General Motors and Ford into one massive organization, Tesla would still be worth more! Not only did Tesla’s value increase, but Tesla CEO Elon Musk became the world’s second richest man as a result of his companies increasing value!
So why is Tesla valued so highly? In October, the company reported its largest quarterly profit ever, taking in over $330 million, which marked the company’s fifth consecutive quarter of growth. They also beat expectations on things like revenue and earning! In addition, Tesla said it still hopes to hit its target of selling half a million cars this year. If you’ve been following Tesla’s progress over the last few years you would realise that this is a big step for the company. For years and years the company lost money as they tried to develop and manufacture cars around the world. Tesla is also getting better at selling cars. They sold about 140,000 cars in the third quarter, which is an increase of about 45% year over year and puts Tesla within reach of its goal of delivering 500,000 cars in 2020. They are also opening new factories in the USA, Europe, and China. It is predicted that Tesla will sell 950,000 cars in 2021, 1.6 million the year after that, and over the next decade nearly 23 million vehicles! Electric vehicles are undoubtedly the future, and Tesla’s technology has an incredible amount of potential.
Despite this, there is a lot of reason to doubt Tesla is actually worth $500 billion. Elon Musk himself tweeted earlier this year saying that Tesla is overvalued. The company is certainly growing and selling more cars than ever before, but let’s compare Tesla and Toyota. Toyota sold 11 million cars in 2019, Tesla sold just 367,500. Tesla is on course to make about $1 billion in profit this year; according to the Nikkei review Toyota made “23 billion in 2019.” Despite this,Toyota is currently valued at half the price of Tesla! The list of car manufacturers i mentioned earlier had a combined profit of $50 billion last year – yet Tesla is worth more than them combined. Are investors really thinking that Tesla’s profits will increase 50 fold?
So is Tesla more actually more valuable than Toyota? Toyota has been extremely valuable for decades, while Tesla has only recently been deemed exceptionally valuable by investors. Tesla must also remain valuable for decades to genuinely compete with Toyota. While Tesla’s value is based on future growth, Toyota’s value is based on its ability to consistently be profitable over many years! Compared to Tesla, Toyota has been consistently stable. Tesla’s value consistently fluctuates. Often this is due to the actions of CEO Elon Musk who has been known to make unpredictable and controversial statements that affect the value of the business. In fact, Tesla’s value is perhaps too connected to Musk. If the CEO of Toyota, Ford, Hyundai, or any other car company resigned or retired, the company value would barely change. If Musk was to leave Tesla, it would definitely harm its value. In a nutshell, Toyota has been extremely valuable, financially and as an enterprise, for decades. Tesla has been exceptionally valuable for less than a year.
So what does all of this mean? Is Tesla worth $500 billion? Is Tesla worth more than all other car companies? Well, it all depends. Something is only worth how much people are willing to pay for it. The people who are buying Tesla stock at this high price believe that it is worth it and they’re going to be able to sell it at a higher price. Like an expensive bottle of wine, a painting from a famous artist, or an apartment in London, Tesla’s value is high and increasing because people believe it is worth that value. Valuing companies is often an irrational process, dependent on the mood in the wider market, and not just the qualities of individual businesses. Tesla’s current value is also based on predictions about the company’s future. One of those predictions is that Tesla will be a major car manufacturer in the future, and their technology will continue to improve! The other prediction is that the value of stock will continue to rise. Many people are buying stock because they believe they will be able to sell it for more in the future, not really because Tesla is selling lots of cars or making large profits.
Nevertheless, Tesla has so far proved many ‘experts’ wrong. The value of the company has increased massively, and if they manage to achieve everything they are planning maybe they will be worth somewhere close to their current value! On the other hand, as a newly valuable company without the decades of profit and a reliable reputation, Tesla could also easily lose much of its value if these expectations are not met! What do you think will happen to Tesla in the future? Do you think Tesla is really worth $500 billion?
Q. What are the three companies I mentioned listed on the S&P 500 index?
A. apple, Microsoft, and Amazon
Q. How much was a Tesla share in January? How much are they now (at the time i’m writing)?
A. $86 in January. Almost $550 now!
Q. How many cars did Tesla sell in 2019?