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NEW YORK (Reuters Breakingviews) - Tesla’s shareholders have driven off into la-la land. By the close on Monday they charged up the company’s market value to $51 billion, taking it just ahead of General Motors to become America’s largest automaker. That implies investors think Chief Executive Elon Musk will outdo even some of his biggest cheerleaders’ expectations.
For all his success, though, Musk has also routinely missed production targets in recent years. Even so, Tesla now trades at some 28 times estimated earnings in 2020. By then Musk expects to be producing 1 million cars a year, up from around 100,000 in 2017.
That will require a huge ramp-up in production, which is no easy feat. Also, that valuation multiple suggests Tesla will either keep growing quickly or else generate pre-tax margins around the 30 percent that Silicon Valley stalwarts Apple and Google achieve rather than the 10 percent that counts as decent in autoland – or maybe both.
It's hard to see that happening, at least without major setbacks along the way. Long-term guesstimates from Morgan Stanley’s auto analysts show a standard-looking car company – and they have been among Tesla’s most bullish followers. They don’t see output reaching 1 million cars until around 2027. By 2030, they reckon the company's pre-tax margin could be around 14 percent, with some $11 billion of profit.
Another way to assess these numbers is to discount the projected 2030 earnings back to this year at a rule-of-thumb 10 percent annual rate. Tesla's current valuation is about 18 times that discounted profit figure.
It's a somewhat arbitrary analysis, but it may hint at what some investors are hoping for. Take Apple in 2004. Back then, the future iPhone maker was trading at just 65 percent of expected earnings this year, discounted back. In other words, then-boss Steve Jobs unleashed growth that blew projections away. If Musk is riding another wave of consumer change – a shift toward electric cars – it could be less dramatic than the smartphone revolution and still pay off for Tesla's investors.
That's possible. By 2030, a quarter of miles driven in the United States could be in self-driving electric cars, according to Boston Consulting Group. Musk faces plenty of competition, though. His backers seem to be assuming he will always have the run of the road.