Tesla’s market cap points to an electric future

Posted on May 23, 2021 by Charles Morris

Tesla’s position as the world’s most valuable automaker is deeply puzzling (and infuriating) to many auto industry and stock market observers. How can it be that a comparatively small company, that sells a tiny fraction of the number of vehicles produced by industry giants such as Toyota and the Volkswagen Group, has a stock market valuation greater than those two combined?

Above: Tesla's Model S (Source: EVANNEX; Photo by Casey Murphy)

To Tesla’s detractors, the EV-maker’s high-flying stock price must be due to unrealistic media hype, or perhaps it’s simply proof that the world has finally gone mad. However, to those who take a broader view of history, the explanation is simple. Stock prices never reflect a company’s present situation—they are based on investors’ evaluation of a company’s future prospects. It’s now clear that the future of automobiles is electric, and when it comes to electric vehicles, Tesla is the undisputed leader.

In January, Visual Capitalist took a look at the relative valuations of the world’s automakers, in the context of a race towards a market cap of a trillion dollars. The valuations cited in the article are no longer current (TSLA’s stock price has taken a beating over the last couple of months), but the relative standings of the top automakers haven’t changed much. As of this writing, Tesla’s market cap is about $557 billion, putting it comfortably in the number-one position. Second-place Toyota was recently valued at around $224 billion, and third-place Volkswagen at $149 billion.

Above: A look at Tesla's market cap compared with other automakers back at the beginning of the year (Infographic: Visual Capitalist)

What conclusions can we draw from this leaderboard? Two obvious ones: investors are firmly convinced that vehicle electrification and autonomy are the keys to future profitability, and that Tesla’s advantages in these areas are not minor ones. As Visual Capitalist notes, even rival automakers freely admit that Tesla has a huge head start in terms of electronics and software. In 2020, Nikkei Business Publications commissioned a teardown of the Model 3, and concluded that its batteries and AI chips had about six years on Toyota and VW. Others who’ve analyzed Tesla’s vehicles, including auto manufacturing expert Sandy Munro, have reached similar conclusions.

Traditional auto brands are struggling to catch up, some more successfully than others. It’s only logical that Toyota, VW and Daimler, the world’s three largest automakers by volume, round out the top four in market cap. However, it may be no coincidence that these firms are also current or potential leaders in the EV race. The Volkswagen Group has made more progress on the electrification front than any other legacy automaker—it plans to invest $86 billion in digital and EV technologies by 2025, and is already building new battery plants and converting existing factories to EV-only production lines. Toyota, which has been a conspicuous electrification laggard, has recently shown signs of a change of strategy, announcing plans to introduce 15 electric models by 2025.

It’s also interesting to note that Tesla is not the only young electric automaker that’s punching far above its weight in the market cap category. Three Chinese EV startups—NIO, Xpeng and Li Auto—made the list of the top 25 automakers by market cap. (In January, NIO was, incredibly, in the #5 spot, though its stock price has since retreated.)

Of course, as we all know, correlation is not causation, and investor sentiment is famously fickle. But these figures offer a pretty good indication that the stock market expects e-mobility to shape the future of the auto industry—and that it expects Tesla to continue leading the way.

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Written by: Charles Morris; Source: Visual Capitalist

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