Expert Opinion: Will Tesla Be the Next Netflix? It Could Be Another Google
Apr 25, 2022
Tesla is quickly ascending to the throne of the side business. It is a conglomerate of many business concepts that are supported by an extremely powerful core operation.
Tesla (TSLA) supporters feel the other firms are a positive thing, but Tesla's bears are skeptical.
Who is correct isn't critical to the stock price as long as the core company remains robust, but CEO Elon Musk's willingness to invest money and time in other areas might determine how long that remains the case.
Netflix (NFLX) and Alphabet (GOOGL) have opposing views on what may happen to Tesla. Tesla is currently like Alphabet, one of the few companies still worth more than Tesla's $1.1 trillion market value. (Its market capitalization is around $1.7 trillion.)
In the fourth quarter of 2021, Alphabet made around $57 billion in revenue. That small search bar on the internet brought in around $32 billion, or 56% of the total. The Alphabet category of services, which includes search and businesses such as YouTube, generated operating profit equal to 122 percent of the company's total. Alphabet's "other investments" and cloud businesses lost around $2.4 billion.
Cars are to Tesla what search is to Google. Tesla's first-quarter revenue came from the sale of electric vehicles, which accounted for over 90% of the company's total revenue. The automobile industry produced 101 percent of overall gross profit.
Tesla's other businesses include well-known items like solar roofing and battery backup power solutions for residential and utility customers. Battery goods are a crucial sideline for Tesla, just as YouTube is for Alphabet, but the company also has "other stakes." Musk intends to construct humanoid robots in a project named Optimus, and he wants to build a vehicle specifically for Robo-taxi uses.
"Those who are astute or pay close attention will see that Optimus will ultimately be worth more than the vehicle company, worth more than [self-driving cars]," Musk stated during Tesla's fourth-quarter results conference call. That is an incredible assertion, but there are also large estimates for various Tesla side hustles.
Cathie Wood, portfolio manager at ARK Invest, predicts that Tesla's robot-taxi company will produce $284 billion in revenue and $151 billion in earnings before interest, taxes, depreciation, and amortization by 2026. That means that Tesla's robot-taxi company would be larger than Alphabet's in 2021,
That opinion is not shared by all bulls. Gary Black, portfolio manager of the Future Fund Active ETF (FFND), loves Tesla shares, but his financial model assigns no value to Tesla's autonomous-driving technology.
He believes that anything Tesla makes will be copied and that self-driving technologies would only help it sell more vehicles at greater prices. Offering the technology will be similar to being one of the first automobile manufacturers to incorporate anti-lock brakes or side-curtain airbags — non-transformative features that drivers appreciate, he says.
This increases the prospect that Tesla is making a mistake by concentrating on robotaxis instead of building a new vehicle. According to Bernstein analyst Toni Sacconag I, Tesla is taking a risk by attempting to power 50% yearly growth in sales volume with only two lower-priced vehicles, the Model 3 and Y. Being late to the game with a lower-priced EV might allow competitors to catch up to Tesla.
Analyst Pierre Ferragu of New Street Research is less concerned. He recognizes Tesla's need for a lower-cost vehicle but notes that the business is selling all of the cars it can now produce. He predicts this will continue for many years because EVs are predicted to account for 40 percent to 50 percent of worldwide light-vehicle sales by 2030, up from approximately 7 percent currently.
Ferragu also points out that Tesla produces EVs at a far higher profit margin than competitors, giving it the best opportunity of developing a lower-cost vehicle.
However, GLJ Research analyst Gordon Johnson finds connections between Tesla and Tesla (NFLX). He predicts that if growth slows, Tesla's value multiple will fall as it did with the video-streaming business on Wednesday. The stock sank nearly 35% when management stated that subscribership declined in the previous quarter and projected more of the same.
"Tesla has just gone ex-growth, similar to Netflix," Johnson commented on Thursday. He believes that sales would be flat or lower in the second quarter due to supply-chain issues limiting Tesla manufacturing.
The crucial issue is that the markets for EVs and streaming video in the United States are not the same. Few homes own EVs, but the majority binge-watch Netflix.
That means Johnson's worries that Tesla may end up like Netflix may have to wait for another day. Ferragu, for one, feels that as long as Tesla continues to sell more vehicles, the stock will be safe: as long as the core is solid, the side hustles will be good.
At $1,580 per share, Ferragu has the highest price objective for Tesla stock on the Street. Johnson, a long-time Tesla critic, has set a price target of $67.
Among those who follow Alphabet stock, there is no comparable to Johnson. The shares are rated Buy by all 54 analysts who monitor the business, compared to less than half at Tesla. The average Buy-rating ratio for S&P 500 companies is around 58 percent.
The explanation for the rating disparity isn't merely due to the firms' varied prospects. Because Alphabet, formerly Google, has always been a tech business, few value investors have ever remarked on it. The automotive industry, on the other hand, hasn't been a growing sector in about 50 years, so those who follow Tesla are more concerned with value. Traditional car investors and analysts really struggle with Tesla's valuation.
"I don't get the Google comparison at all. The marginal cost of generating a $ of revenue from search or Youtube is just a little lower than the cost of generating a $ of revenue from making EVs. And while Elon is preparing the no pedal no steering wheel robotaxis in his mind Google has a robotaxi on the road...and that's just a mini side hustle. The Apple analogy is silly too EVs don't have a 2 year upgrade cycle...plenty of people will pay an extra few $100 for the state of the art Iphone (esp since it's buried in the monthly cell bill) for the whole family that's way different than paying $15k premium for "the best" EV +$12k for fsd.And even less likely they will buy one for the spouse and one for the kids too....and upgrade every 2 years "
— Lawrence Weinman
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