The price of Tesla’s stock market valuation increased sevenfold in the last year and is currently around 700 billion US dollars (570 billion euros). The German car company VW (79 billion euros), Daimler (61 billion euros) and BMW (46 billion euros) come together to around 186 billion euros.
Long before Tesla’s course exploded, there was considerable skepticism. It was not for nothing that the share was one of the “most-shorted-stocks”, that is, those shares on whose price decline is bet. One can only note a true bloodbath for the bear market speculators.
On the other hand, we know that past developments are only of limited use as an indicator of future performance. On the contrary, it is not infrequently the case that stocks that rise ever faster and higher, collapse all the more abruptly. I cannot say whether this will be the case with Tesla. In any case, skepticism is appropriate.
Relevant to the future of the automotive industry
Now you can read that car manufacturers like VW drive up their own stock price want to avoid having an increasing financial disadvantage compared to Tesla. That sounds good in theory, but it will be difficult to realize. Because it’s not just a matter of how the companies are rated relative to one another, but also of what the sector can be worth as a whole.
Contrary to an increasingly widespread opinion, it also plays a role in an environment of interest rates close to zero, how much cash flow the companies generate. This also applies to the sector as a whole. So you don’t just have to have quite optimistic assumptions about future quantities and profitability of Tesla, but also for the entire industry. It may well be that Tesla will soon dominate the industry, but how attractive will the market be in the future?
It is not just technological change that poses challenges for industry. The changed consumer behavior is at least as serious. The younger generation sees their own car less and less as a status symbol: use is more important than owning.
Added to this is the undisputed need for metropolitan areas to find other mobility concepts and the global trend towards reducing greenhouse gases. The market is getting smaller in two senses: fewer cars and then on average also smaller vehicles. This puts further pressure on profit margins.
2017 could go down in history as the year in which the industry reached its absolute peak with 80 million vehicles produced – Peak Auto. Shrinking industries with excess capacities are not much fun even under normal circumstances. If we add the technological change and the (environmental) political pressure, one can really only advise against putting automobile stocks in the depot. Suppliers like Tesla may do relatively better, but that doesn’t have to mean that they are absolutely still fun.
Paper profits are nothing
So far, Elon Musk’s wealth is only on paper. Its 20 percent stake in Tesla alone is worth 140 billion. Many more billions are waiting for the company to achieve its goals. The problem here: No matter how justified Tesla’s valuation may be or not, the profits are only on paper. Should Musk look soberly at his portfolio, he would have to consider how he can partially secure the profit.
That wouldn’t be easy. Because as soon as he starts to sell on a larger scale, he pushes the price. Other investors could also have doubts and the price would be heading to a significantly lower level faster than expected.
So what to do Well, a look at the history of the stock market helps. Steve Case, co-founder and CEO of America Online (AOL), then the world’s largest internet provider, had a similar problem in 2000. Supported by the new economy euphoria, AOL was far overrated – which, like today, was a not undisputed assessment.
In January 2000, AOL took over the much larger classic media company Time Warner for $ 165 billion and paid for it with its own highly rated shares. Together, the companies on the stock exchange were worth around 350 billion and the shareholders of AOL – although much smaller – held a stake of 55 percent. The markets were enthusiastic, the price of AOL continued to rise because of the announcement.
The rest is history: the Internet bubble burst, the integration of the companies was progressing badly and nine years later the company, whose market capitalization had shrunk to a miserable 38 billion dollars, sold AOL again.
AOL / Time Warner is often cited as an example of a failed takeover that has destroyed around 300 billion dollars in value. But that’s not entirely true. As always, there are winners and losers.
The winners are those who have used the acquisitions to exit – as Time Warner shareholders, even more so than AOL shareholders. Even those AOL shareholders who did not exit because they did not want to or could not – like the major shareholders – suffered less loss than they would have had to accept without this merger. An indicator for this is the value of AOL in 2009 of around three billion euros.
Losers were those who swapped their Time Warner shares for shares in the new company and did not sell them. So there was a shift in wealth, which was particularly useful for those who sat on high paper profits and suspected that they would not be sustainable.
Tesla can buy anything
Again: I am not a clairvoyant and do not claim that Tesla today can in any way be compared with AOL back then. The situation that major Tesla shareholders are looking for an intelligent way to realize paper profits on a larger scale is likely to be similar.
The rationale for buying a traditional manufacturer is obvious: Tesla has the technological expertise for batteries, electronics and autonomous driving, etc. The partner of the old industry brings competence in production, if possible one or more good brand names and a sales network. It would be laughable if there were no consultants who could identify significant synergies.
One problem remains: which company should Tesla buy? Compared to their own market capitalization, all other automobile manufacturers are dwarfs. In terms of image and potential, it should be a German provider. VW offers a lot, but is likely to retire due to the ownership structure (state of Lower Saxony) and the strong unions. Will BMW and Daimler stay – or preferably both? With a good 100 billion euros for BMW and Daimler together and a generous bonus, the old shareholders of Tesla would still have a good 75 percent in the joint company. Similar to the year 2000, Tesla shareholders are likely to be enthusiastic and the share price would rise. Because who, if not Elon Musk, should catapult the “dinosaurs” of the automotive industry into the future?
If I were Elon Musk, I would seriously think about it. If I were a shareholder in BMW and Daimler, I would hope so – and if it really happened, take the money off the table.
Just a mind game – no prognosis.
Daniel Stelter is a member of the opinion makers of manager-magazin.de. Nevertheless, this column does not necessarily reflect the opinion of the editorial team of manager magazin.