A few articles crossed my desk recently, and I promptly dismissed them with a chuckle, until I noticed a pattern. The mainstream financial media has recently used Market Capitalization as the de facto yardstick for determining if one company is “bigger” or “more valuable” than another. Using this metric results in some hilariously illogical declarations, such as “Tesla passes General Motors to become the most valuable US automaker.” Anyone who has been in a traffic jam on a US highway should be able to look to the left and look to the right and laugh at the idea that the upstart electric car manufacturer with a grand total of 3 models could be more valuable than the Camaro brand, let alone worth more than the megalithic General Motors as a whole. And yet, there it is, in black and white, NASDAQ:TSLA market cap $51.9B > NYSE:GM $51.2B > NYSE:F $45B. What gives?
Market cap is simply the # of shares outstanding multiplied by the price per share. One of these numbers is an objective fact (# of shares) and the other is sometimes wildly out of touch with reality (price per share). Keep in mind that price is not the same thing as value. As financial instruments, equities have intrinsic value that can be calculated. That value per share often diverges from the price per share available on the open market. These gaps are sometimes explained by greed, or fear, or even ignorance.
Telsa has never recorded an annual profit and yet shares of the company command an eye-popping premium on the open market. In 2016, the company lost $675M on $7B in revenue. If the company were to post a $1B profit on $10B revenue in 2017 – a result that would elate investors – then the P/E would still be north of $50 for every $1 in profit. Ford, in comparison, only costs $10 for every $1 in profit. And this is the rosiest of all imaginary scenarios for Tesla. A billion in profit is a pipe dream right now, a milestone years away. The only reason that Tesla is “bigger” or “more valuable” than Ford and GM is because the shares are drastically overpriced.
Same misconceptions in the alcohol industry
I saw the same concept driving a similar article about two less-familiar businesses: “Kweichow Moutai overtakes Diageo as world’s most valuable distiller.” I had never heard of Kweichow Moutai, but Diageo is one of my favorite investments: a true cornerstone of my portfolio. It’s an attractively-priced UK company selling legendary adult beverage brands such as Johnny Walker, Crown Royal, Captain Morgan, and Guinness among dozens of others. Diageo peddles all types of alcohol worldwide, at all price points. It’s a dreamy business with its wide moats, strong balance sheet, and diversified addictive products.
So what’s up with Kweichow Moutai, and how could it be more valuable than Diageo? Oh, it sells ONE product? In ONE country? And that product hasn’t taken root in any other countries despite intense efforts? And the product is a super-premium offering, way out of the purchasing range of the vast majority of the world’s population? Wow, here’s another case of wildly mispriced assets.
So that’s today’s lesson: price is not value. And sometimes the two numbers drift so far from reality that you see some truly silly headlines. NBC could’ve used a more accurate but less clickbaity title, “Tesla is now pricier than GM.” Then everyone could agree!
Disclaimer: we have no direct positions in F, GM, or TSLA though may be long these equities indirectly via index funds. One of the authors is directly long DEO. Neither author nor Duke of Dollars, LLC received compensation from any of the companies mentioned in the article.