Back in the 1999/2000, AOL was worth more money than all media firms. It was a real company – sales, profits, etc. But investors forgot one thing: Firms only have so much $$ to spend on advertising. Investors are forgetting the same about cars.
Fundamentally, Tesla is a car company. Oh you can argue they have a battery business and a solar business and an insurance business etc. But really 99% of their business is cars.
And it doesn’t matter what a car can do – I (you, consumers) only have so much money to spend on a car. And this is a well known quality. The car industry is a mature one. Except for a few emerging markets, everyone has a car that is going to buy one.
What does this mean for Tesla? Well, here are the profits for the top 14 car companies in the world.
| Net Income (Billions) | Net Income (Billions) | |||
| Toyota | $23.00 | Volvo | $1.72 | |
| Volkswagon | $18.81 | Hyundai | $2.97 | |
| Daimler Benz | $2.97 | Fiat Chysler | $7.42 | |
| GM | $6.60 | Ford | $0.50 | |
| Ferrari | $0.77 | Kia | $1.66 | |
| BMW | $5.00 | Nissan | $2.87 | |
| Honda | $5.86 | Subaru | $1.42 | |
| Total | $82 |
The entire car industry made $82 billion in 2019. (I didn’t use 2020 because of COVID). That means, if Tesla had 100% market share, Tesla would have a P/E ratio of 10.
Think about that. If Tesla TODAY had 100%, margins of these other automakers (they don’t), it would trade at a PE of 10.
In an industry that is very mature. With a lot of competitors.
The bottom line is that Tesla is incredibly overpriced. It will never become the entire industry. Probably not even close. The party will end at some point. When? I don’t know, but it will.