This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Tesla (NASDAQ: TSLA) Chief Executive Officer Elon Musk is no stranger to hyperbole.
Musk, who also runs SpaceX and a number of other companies, has been known to make big often exaggerated promises. For example, he once called the Hyperloop, which was never built, the "fifth mode of transport" and famously promised to take Tesla private in a Twitter post, saying he had secured financing that he didn't have.
However, Musk also has a track record of eventually fulfilling some of his big promises. For example, the Cybertruck became a reality in late 2023 after years of hype. Now he's made one of his biggest predictions yet.
Previously, Musk had said Tesla would be the world's most valuable company, but on Tesla's fourth-quarter earnings call last week, Musk raised the bar, saying:
"I'm not saying it's an easy path, but I see a path to Tesla being the most valuable company in the world by far. Not even close, like maybe several times more than — I mean, there is a path where Tesla is worth more than the next top five companies combined."
Currently, the five most valuable companies in the U.S. are Apple, Microsoft, Nvidia, Alphabet, and Amazon, and they have a combined market cap of nearly $15 trillion, meaning Musk expects Tesla's valuation to reach at least $15 trillion (it's about $1.2 trillion as of this writing). The valuation of those other companies should increase as they grow, so Musk is really forecasting an even larger valuation for Tesla, though it's hard to imagine what that will be in the future.
Musk's math
Musk didn't outline the arithmetic behind that forecast, but it's clear he believes that full self-driving autonomy and operating a robotaxi marketplace is the path to getting there.
The Tesla chief has long envisioned an autonomous ride-sharing marketplace unlocking enormous value for Tesla and noted on the call that a typical passenger car is only used about 10 hours a week. According to his estimate, an autonomous vehicle that could be shared would be used 50 to 55 hours a week, and he argued that such a transition would be the "largest asset value in human history."
It's hard to put a dollar figure on that kind of business, but Uber could offer a good proxy.
Uber hasn't reported fourth-quarter earnings yet, but the company is on track for roughly $160 billion in gross bookings, and that number is still growing quickly, up 16% in the third quarter. That represents how much money customers are spending on ride-sharing and delivery. Uber only keeps a small fraction of that as revenue, while the majority goes to drivers.
However, in an autonomous vehicle regime like Musk imagines, all of those gross bookings would go to the owner, and Musk seems to believe it will have software-like gross margins, which could be in the 80% range. The costs to operate the network will primarily be charging and maintenance. If Tesla was able to collect $160 billion from ride-sharing at an 80% gross margin, it would keep $128 billion as gross profit. That would be much more than Tesla's gross profit of $17.5 billion in 2024, but operating expenses would also have to increase to support the ride-sharing marketplace.
If we assume a 50% operating margin for Tesla on the ride-sharing network, it would earn $80 billion in operating income on top of the $7.1 billion the business earned last year.
If Tesla's net income were to approach $100 billion, a valuation of $15 trillion would still mean a sky-high price-to-earnings (P/E) ratio of 150, which seems implausible. Tesla currently trades at a similar P/E ratio, but that's because high expectations are baked into the share price based on the potential for autonomous vehicles.
Can Tesla get there?
Over a long enough time frame, Tesla could get to a valuation of $15 trillion. After all, just a few years ago there were no companies worth $1 trillion, and now there are nine in the U.S. alone.
However, even if the robotaxi network is a success, Musk's goal of Tesla being more valuable than the next five most valuable companies is farfetched. No company has achieved that in modern history and will likely not ever as it would be near impossible for one company to command that much of the stock market's value.
Musk's visions of autonomy do hold promise, but investors shouldn't get carried with his sky-high forecasts. Take his predictions with a grain of salt and keep your eye on fundamentals and what's happening with autonomous driving in the real world. Tesla could still be years away from any autonomy breakthrough meaningful enough to hit the bottom line.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
