Tesla (NASDAQ: TSLA) appears to be a better pick compared to General Motors (NYSE: GM), even though TSLA stock trades at about 18.3x trailing revenues, while GM at 0.6x. So, how does this gap in valuation make sense? While the automotive sector has been heavily hampered by the pandemic with sales volume dropping exponentially, Tesla’s revenue grew by 28% in FY 2020. There is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard General Motors vs. Tesla: GM stock looks undervalued compared to TSLA stock has more details on this. Parts of the analysis are summarized below.
1. Tesla’s Revenues Have Grown Exponentially
Tesla’s revenues grew 67% since 2018 to $35.9 billion over the last twelve month period. The sales growth has been led by the Model 3, which was the world’s best-selling all-electric vehicle model in 2020. Our Tesla’s Revenuesdashboard summarizes the segment-wise breakup of the company’s revenues. Looking at GM’s Revenues, its total revenue over the last twelve months have fallen to $122 billion, compared to $147 billion in 2018 as the company lost its market share in regions across the world with United States being the exception. Looking forward, now that nearly half of the U.S. population is fully vaccinated for Covid-19, the overall economic activities are likely to move a step closer to normalcy, which should bode well for both these companies.
2. Tesla Has Continuous Improvement In Operating Margin
Tesla’s operating margins stood at 6.4% over the last twelve month period, reflecting a 820 bps improvement from the levels of -1.8% in 2018. GM’s operating margin of 10.0% over the last twelve month period reflects a rise of 150 bps from the 8.5% figure seen in 2018. Tesla’s margins have been rising due to sale of regulatory credits which are nearly pure profit and economies of scale achieved due to higher production. In the recently reported Q2 2021 the company’s core automotive business turned a profit without relying on the sale of regulatory credits. Meanwhile, GM has been phasing out sedans in North America which has resulted into a change in revenue mix. Hence due to a focus on higher profit models, GM’s operating margins have improved. Therefore, both the companies have done well on this front but Tesla has managed to improve multifold compared to GM.
The Net of It All
Although GM’s revenue as well as sales volume is much larger than TSLA’s, the latter has seen higher growth in revenues over the recent years as well as better improvement in operating margins. Looking at the post-Covid recovery, TSLA has fared better in the first six months of 2021, with revenues rising at a healthy pace of 86%, compared to 35% growth for GM revenues. Due to all these factors, TSLA’s stock is valued at a higher P/S multiple of 18.3x, compared to 0.6x for GM. Therefore, we believe this gap in valuation makes sense and TSLA appears a better bet with better operational performance and higher past returns, when compared to GM.