Recently, the fact that the market capitalization of Tesla passed that of Ford and GM attracted a good deal of attention. In some quarters, it was taken as evidence that Tesla was overvalued. How could a company the manufactures a small fraction of the number of vehicles be “worth more” than Ford and GM?
While I agree that Tesla is overvalued – my DCF models suggest values of abour $170, not in excess of $300 – comparison of market capitalizations is not the appropriate benchmark. Instead, what should be compared are the operating values of the companies or what is often called enterprise value. The enterprise value equals the value of the equity plus debt minuses cash and short-term securities.
The table belows shows the calculation for all three companies. As advertised, the equity value of Tesla exceeds that of its competitors. However, the enterprise value of Tesla is less than half that of Ford and GM. Therefore, while it might be right to conclude that Tesla is overvalued, that conclusion should not be based on a faulty comparison.