Here’s the math for Tesla’s stock price if it becomes the Apple of car makers

For those that don’t know, successful the aboriginal 2000s it was unimaginable that these bequest mobile telephone manufacturers could disappear. In 2006, Research successful Motion (RIM), the institution making BlackBerrys, mislaid a patent suit against NTP and a U.S. District Court justice slapped an injunction connected sales. The Defense Department stepped in, claiming that a Blackberry injunction was a menace to nationalist security. Meanwhile, manufacture person Nokia held a 40% marketplace stock and by the extremity of 2007 sported a $230 cardinal marketplace cap.

But thing other happened successful 2007.

Steve Jobs introduced the iPhone.

And that changed the crippled for Nokia, Blackberry and the full industry, forever.

Coincidentally, Jobs introduced that iPhone 7 months aft Tesla introduced the Roadster astatine the San Francisco International Auto Show. Fast guardant to 2021, and the bulls are suggesting that Apple’s overwhelming occurrence successful handset manufacturing tin beryllium mirrored successful automobile manufacturing by Elon Musk’s Tesla.

For this to happen, let’s archetypal presume that wrong 15 years buyers volition request a broadly akin “form factor” for immoderate vehicle. Today, determination are 250 brands of cars sold to acceptable each appetites and budgets, and possibly implicit 1,000 trims. Meanwhile, acknowledgment to the iPhone, handset hardware has gone from a myriad of styles, sizes and forms to fundamentally one.

Similarly, let’s ideate that the accumulation and worth of automobiles and airy trucks volition go little astir the benignant oregon show that is demanded and alternatively mostly astir the bundle wrong the vehicle.

Finally (and this is simply a immense debate, but) let’s presuppose that Tesla volition person amended bundle – astir importantly amended autonomous driving capableness – than immoderate different vendor oregon manufacturer, whether successful Silicon Valley, Detroit, Wolfsburg oregon elsewhere.

In different words, let’s presume that Tesla is going to go the Apple of automakers.

To bash this, we request to disregard that Apple is not conscionable a handset manufacturer. In the archetypal 3 quarters this year, it reported implicit $150 cardinal of iPhone sales, which represented 55% of full sales. It besides reported income from the “Services” segment, which included income from advertising, integer content, AppleCare and different lines. If we presume each that gross was driven by the iPhone (even though not each was), past we get the iPhone representing astir 65%-70% of Apple’s sales.

This implies Apple has a important concern (about $110 cardinal this year) selling Macs, iPads, wearables and accessories too. So successful our “Tesla is Apple” analogy, we request to presume that Tesla volition marque akin extensions into caller products.

We besides request to disregard that astir of the nett for Apple successful handsets comes from mobile advertizing and app sales, overmuch of which Apple reports successful that services conception noted above. Again, to enactment successful our framework, we besides request to judge that Tesla would make thing akin via its over-the-air updates oregon its ain app store.

Making each these assumptions, past aboriginal margins successful “automaking” – for astatine slightest 1 shaper – could theoretically commencement trending up toward the margins generated contiguous by Apple.

So successful presumption of handset marketplace share, radical astir the satellite are going to bargain astir 1.4 cardinal handsets this year, and the mean selling terms volition beryllium astir $320. Apple has astir 16% of the planetary market, and volition merchantability astir 225 cardinal iPhones.

Just guessing here, but if these iPhones are sold astatine an mean terms of $890, past the mean terms of each the different phones sold successful the satellite needs to beryllium astir $125 for the mathematics to marque sense. And due to the fact that Apple tin merchantability its iPhone astatine specified a immense premium and nutrient singular revenues from advertizing and app store sales, it generates a whopping 24% net margin.

In comparison, Volkswagen VOW3, -0.49% VWAPY, -2.65%, which started operations successful 1938, has worked its mode up to a planetary marketplace stock of 12.0% and generates nett income margins of 5.0%.

Toyota 7203, +0.33% TM, -0.12%, which besides started operations successful 1938, besides has a planetary marketplace stock of 12.0% and generates adjacent amended nett income margins of astir 7.0%.

Nokia, for what it is worth, generated 14% nett margins earlier the iPhone changed the game.  In different words, adjacent earlier Apple showed up, handset manufacturing was implicit doubly arsenic profitable for marketplace leaders arsenic making cars.

Anyway, folks astir the satellite volition bargain astir 75 cardinal caller cars this year, and astatine an mean terms of $30,000 (ballpark) this works retired to implicit $2.2 trillion successful sales. This is astir 5 times larger than the handset market, which volition travel successful astatine astir $450 million. Toyota and Volkswagen are the largest – and champion successful people – standard automobile manufacturers successful the world. Other groups, including Ford F, +2.37%, Stellantis (FCA/Peugeot) STLA, -1.17%, Daimler DAI, +2.25%, General Motors GM, +0.78%, Honda 7267, -0.53% HMC, -0.59%, BMW BMW, -0.11% and galore others besides person important share.

This year, Tesla volition merchantability astir a cardinal cars, representing a planetary marketplace stock of 1.3%.

And situation I accidental that each of Tesla’s competitors volition beryllium loath to surrender much marketplace share, frankincense the immense magnitude of R&D and superior spending they volition give to the upcoming modulation to electrical vehicles (EVs). On the CAPEX metric alone, we tin spot that these competitors volition really walk much adjacent twelvemonth than Tesla.

A batch more.

But still, let’s presume each the bequest automakers neglect to support share. Let’s besides envision that astir of the profits successful the manufacture volition yet spell to Tesla (as they person successful handsets to Apple).

As a baseline, analysts expect that Tesla volition make implicit $50 cardinal successful income this year. Over 85% of these income are related to its automotive business.

In 2035, if EVs represents 95% of each caller cars sold, and Tesla has the aforesaid 16% marketplace stock arsenic Apple does contiguous (significantly eclipsing that of VW oregon Toyota), it volition beryllium producing 22 cardinal cars and airy trucks, and generating income of implicit $1 trillion.

This year, analysts expect that Tesla volition make astir $7 cardinal successful adjusted nett income (which volition see astir $1.2 cardinal successful profits driven by regulatory credits).

If Tesla were capable to make the aforesaid 24% nett net borderline arsenic Apple does contiguous (remember VW is astatine 5% and Toyota astatine 7%), past it would nutrient astir $250 cardinal of net successful 2035.

As Tesla has grown from zero to 1 cardinal cars, it has built accumulation facilities successful Freemont, Shanghai and soon Austin; battery-producing gigafactories successful Nevada, Buffalo, Germany and Austin again; and different manufacturing and tooling facilities successful Michigan, Ontario, Shanghai, 2 much successful California and 3 much successful Germany.

To concern this expansion, Tesla went from 35 cardinal diluted shares successful 2009 to 641 cardinal successful 2015 to implicit 1.1 cardinal today. Of people immoderate of these went to cardinal executives successful the steadfast arsenic compensation, but for the astir part, this stock issuance helped to concern the firm’s stunning maturation to date.

And if Tesla is going to physique implicit 20 cardinal units a twelvemonth (up from astir 1 cardinal this year), this volition necessitate a batch much capital. But fixed its beardown stock terms and interior currency travel generation, let’s presume that the complaint of caller stock issuance astatine Tesla volition dilatory dramatically, to conscionable 1.5% caller shares per year. At this rate, they would person “only” 1.4 cardinal shares successful 2035.

And successful that year, connected accumulation of 22 cardinal vehicles astatine an mean selling terms of $46,000 (again, our guess) and doing 24% nett net margins, this $250 cardinal of net would enactment retired to astir $178 per share.

Given Tesla’s domination successful this script wherever it maxes retired its marketplace share, the lone antagonistic is that it would nary longer beryllium a secular story, but 1 much exposed to the cyclical quality of automaking. So its immense magnitude of gross and income would people beryllium increasing overmuch much dilatory by then. But, again for the involvement of this exercise, let’s presume that Tesla volition inactive find a mode to proceed to make a accordant 10% EPS maturation connected that $250 cardinal number.

And contempt this slowing, let’s besides presume that investors volition privation to wage a P/E ratio of implicit 20 for a present immense and cyclical business.

On a P/E of 22.5, that would enactment retired to a marketplace headdress of $5.6 trillion, and a stock terms of $4,000.

These are large numbers. And contempt what we perceive from the much optimistic of the Tesla bulls, let’s besides presume that today’s shareholders lone anticipation to marque 10% per twelvemonth betwixt present and 2035.

If we discount that $4,000 by 10% backmost to today, the shares are worthy $1,050.

That is beauteous adjacent to wherever we are close now.

So each that supra is what needs to hap for $1,050 to beryllium a just stock terms today.

Doubters, admittedly similar us, volition suggest that the execution hazard is tremendous, and these marketplace shares (and peculiarly the margins) whitethorn beryllium impossible.

Yet, contempt the information that we really can’t disregard the differences betwixt the mobile telephone and automobile industries noted above, the believers – who whitethorn so beryllium close – volition virtually request to spot Apple-esque manufacture dynamics, marketplace shares and net margins for this each to marque sense.

It is besides important to see that for determination to beryllium adjacent much upside successful the shares from existent levels, Tesla volition really person to transcend everything that Apple has accomplished.

Whether a bull oregon a bear, determination is nary doubting that what Musk has achieved frankincense acold has been thing abbreviated of incredible. Five years ago, fewer would person thought it adjacent imaginable that Hertz would bid 100,000 Teslas successful a azygous bid for its car rental fleet, oregon that Tesla would nutrient and merchantability a cardinal cars successful a azygous year. 

He volition proceed to bash unthinkable things.  He has changed the satellite and the mindset of his competitors. None of that is successful question. The aboriginal that his stock terms is discounting is the question we are asking today.

Andrew Dickson is the main concern serviceman of Albert Bridge Capital, a manager of concentrated equity portfolios for organization investors. He holds holds nary presumption successful Tesla, agelong oregon short. Follow him connected Twitter @albertbridgecap.