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[edit]: Current finance professional here. > When two companies have wildly different capital structures, you have to compare them on enterprise value, not the

by robzyb 10y ago

[edit]: Current finance professional here. > When two companies have wildly different capital structures, you have to compare them on enterprise value, not the market cap of their equity. So while I give kudos to Tesla for building a valuable business, it still has a long way to go to catch up to Ford. That is not necessarily true. Market cap and enterprise value are two equally valid ways of measuring value or worth. There are even more ways to measure value, such as DCF or value of assets. All of these have their pros and cons. In this case, my personal opinion is that market cap is a very meaningful way to measure Tesla/Ford and that it's noteworthy that Tesla has passed Ford. I think it is very meaningful because it (loosely) implies that the present value of Tesla's profits (i.e. net profit after tax) is higher than Ford's. Even on a risk-weighted basis. Or, at least, that's roughly-kinda-sorta what the market believes. I would argue that enterprise value would be more meaningful that market cap if we were talking about which company was 'bigger'. However, the interesting thing here is that Tesla has become more 'valuable' than Ford, for this definition of value.

aerovistae 10y ago
Current amateur here. I feel like there's only one important thing to consider when comparing Tesla and Ford as investment opportunities: is their value likely to increase? With Tesla, there's an obvious path for potential massive growth. It's not guaranteed, but the potential is obvious. With Ford, it's like any other auto manufacturer. What surprises are we expecting? What new products or innovations? Does Ford have any path, even hypothetical, to massive market share growth relative to its current position the way Tesla does? It seems clear to me that the answer is no. Even if their Bolt is a success, they're not about to dominate the market, double their sales, and double their stock. They don't have any Model 3 type event on the horizon. So all these comparisons of financial metrics on current value, to me, seem pointless. This is the only thing that should matter (along with whatever analysis you want to use to gauge whether Tesla is likely to be able to execute on its plans, which is a more complex question-- but performance so far makes it clear that they are experiencing steady and dependable growth of production and sales with clear, well-defined plans for further future growth.)
- traviscj 10y ago
  Irrelevant nit that doesn't undermine your point: the Bolt is made by Chevrolet.
  - aerovistae 10y ago
    Totally forgot, sorry. Right you are.
- dkrich 10y ago
  The problem with this analysis is that it ignores current valuation. What if somebody offered to sell you 1,000 shares of ford right now for $1 each? Would you buy? Of course you would because you know that the value of one share is much higher than $1. So despite whether you think Ford has room to grow, it's very possible that the market is simply undervaluing it as a company, all things considered- assets, brand value, liabilities, etc. The question isn't necessarily "can this company grow?", it's "what is the value of this enterprise as a cash-generating vehicle?"
  - aerovistae 10y ago
    But I would only buy the $1 shares because I know the market value is $11. I can see that incontrovertibly. If they offered it at $11 and we were hypothesizing the real value is yet higher still, I would have no way of knowing that the market will soon come to realize the "true value" and increase the price. It would be a gamble of me betting the market comes to realize they've undervalued the company.
    - dkrich 10y ago
      Of course. But your original point was that the only thing to consider is future growth potential and because only Tesla has room to grow that it is a better investment than Ford. My point was that regardless of growth prospects, a company can be undervalued and be a great investment if growth stagnates or even goes down. That is the basic idea behind value investing and what made Warren Buffett the 2nd wealthiest person in the world.
lancewiggs 10y ago
1: Debt + Equity = Enterprise Value. The value of the equity is determined by the stock markets - and that value can vary a lot. 2: Equity Value therefore represents the market's perspective of the Net Present Value of the future cash flows less the value of the debt. Those flows, calculated using a discounted cash flow spreadsheet, could be from profits, or could be from sale of assets. 3: The analysts will forecast the Enterprise delivering a certain IRR - annualised percentage return, which is split between the debt and equity. This total return is called the weighted average cost of capital - WACC. 4: Debt is cheaper than equity, and it also has a lovely tax shield effect from the interest expense.* Debt holders get the company when the value falls underneath the total value of the debt though, so you don't want to issue too much. 5: Equity (shareholders) demand much higher returns than banks, but accept the greater risk for it. e.g. VCs have much higher expectations than banks about their returns. 6: The more debt you have the higher the returns - and risk - for the equity. Think about the leverage you can get on a house - an asset with low % returns can deliver high value (or high loss) by using a lot of bank debt. 7: There is a body of work around finding the optimum level of equity and debt for a company - basically you want to balance the risk from having too high debt (and the company value falling underneath that value and using all the equity) and the benefits of higher returns to equity=holders from having higher debt. Going back the the original post - EV is the real value of the company, not market cap. Ford could sell down their debt by issuing more equity, Tesla could issue debt and reduce the share of equity. It all comes back to EV. *This makes the weighted average cost of capital vary slightly as the amount of debt changes.
- robzyb 10y ago
  > Going back the the original post - EV is the real value of the company EV is one way of valuing a company. As is market cap. > Ford could sell down their debt by issuing more equity Absolutely. It's logical to say that a company with less debt is worth more than a company with debt. And the same applies in reverse. Other ways that EV can be distorted, and market cap can be preferred, is whether the company choose to purchase capital assets financed via debt or lease them. For example, a company with big capital assets financed via debt could note that the company would be more profitable if they sold them and leased them back. The company is now more profitable, and its reasonable to say its 'better', but its EV has gone down.
coolgeek 10y ago
> I think it is very meaningful because it (loosely) implies that the present value of Tesla's profits (i.e. net profit after tax) is higher than Ford's. Even on a risk-weighted basis. Or, at least, that's roughly-kinda-sorta what the market believes The "market" (albeit a more limited one) also believes that Uber is worth $70B - almost 1.5X the market cap of Tesla. How meaningful is that?
peterbonney 10y ago
> However, the interesting thing here is that Tesla has become more 'valuable' than Ford, for this definition of value. I think it's a very tortured definition of "value", though... I don't have a Bloomberg terminal in front of me anymore to check, but I'm guessing Ford's bonds are generally trading closer to par than zero. In which case the bondholders are telling you they think there is about $100 billion worth of additional value to Ford's business beyond the value of the equity. That's a really big piece of context to this story. I agree with you in principle that market cap is a perfectly valid metric, but when you're comparing a majority-equity company to a majority-debt company (assuming the bonds are valued as non-distressed assets) it ignores something very, very significant.

by robzyb 10y ago

aerovistae 10y ago

Current amateur here. I feel like there's only one important thing to consider when comparing Tesla and Ford as investment opportunities: is their value likely to increase? With Tesla, there's an obvious path for potential massive growth. It's not guaranteed, but the potential is obvious. With Ford, it's like any other auto manufacturer. What surprises are we expecting? What new products or innovations? Does Ford have any path, even hypothetical, to massive market share growth relative to its current position the way Tesla does? It seems clear to me that the answer is no. Even if their Bolt is a success, they're not about to dominate the market, double their sales, and double their stock. They don't have any Model 3 type event on the horizon. So all these comparisons of financial metrics on current value, to me, seem pointless. This is the only thing that should matter (along with whatever analysis you want to use to gauge whether Tesla is likely to be able to execute on its plans, which is a more complex question-- but performance so far makes it clear that they are experiencing steady and dependable growth of production and sales with clear, well-defined plans for further future growth.)

traviscj 10y ago
Irrelevant nit that doesn't undermine your point: the Bolt is made by Chevrolet.
- aerovistae 10y ago
  Totally forgot, sorry. Right you are.
dkrich 10y ago
The problem with this analysis is that it ignores current valuation. What if somebody offered to sell you 1,000 shares of ford right now for $1 each? Would you buy? Of course you would because you know that the value of one share is much higher than $1. So despite whether you think Ford has room to grow, it's very possible that the market is simply undervaluing it as a company, all things considered- assets, brand value, liabilities, etc. The question isn't necessarily "can this company grow?", it's "what is the value of this enterprise as a cash-generating vehicle?"
- aerovistae 10y ago
  But I would only buy the $1 shares because I know the market value is $11. I can see that incontrovertibly. If they offered it at $11 and we were hypothesizing the real value is yet higher still, I would have no way of knowing that the market will soon come to realize the "true value" and increase the price. It would be a gamble of me betting the market comes to realize they've undervalued the company.
  - dkrich 10y ago
    Of course. But your original point was that the only thing to consider is future growth potential and because only Tesla has room to grow that it is a better investment than Ford. My point was that regardless of growth prospects, a company can be undervalued and be a great investment if growth stagnates or even goes down. That is the basic idea behind value investing and what made Warren Buffett the 2nd wealthiest person in the world.

lancewiggs 10y ago

1: Debt + Equity = Enterprise Value. The value of the equity is determined by the stock markets - and that value can vary a lot. 2: Equity Value therefore represents the market's perspective of the Net Present Value of the future cash flows less the value of the debt. Those flows, calculated using a discounted cash flow spreadsheet, could be from profits, or could be from sale of assets. 3: The analysts will forecast the Enterprise delivering a certain IRR - annualised percentage return, which is split between the debt and equity. This total return is called the weighted average cost of capital - WACC. 4: Debt is cheaper than equity, and it also has a lovely tax shield effect from the interest expense.* Debt holders get the company when the value falls underneath the total value of the debt though, so you don't want to issue too much. 5: Equity (shareholders) demand much higher returns than banks, but accept the greater risk for it. e.g. VCs have much higher expectations than banks about their returns. 6: The more debt you have the higher the returns - and risk - for the equity. Think about the leverage you can get on a house - an asset with low % returns can deliver high value (or high loss) by using a lot of bank debt. 7: There is a body of work around finding the optimum level of equity and debt for a company - basically you want to balance the risk from having too high debt (and the company value falling underneath that value and using all the equity) and the benefits of higher returns to equity=holders from having higher debt. Going back the the original post - EV is the real value of the company, not market cap. Ford could sell down their debt by issuing more equity, Tesla could issue debt and reduce the share of equity. It all comes back to EV. *This makes the weighted average cost of capital vary slightly as the amount of debt changes.

robzyb 10y ago
> Going back the the original post - EV is the real value of the company EV is one way of valuing a company. As is market cap. > Ford could sell down their debt by issuing more equity Absolutely. It's logical to say that a company with less debt is worth more than a company with debt. And the same applies in reverse. Other ways that EV can be distorted, and market cap can be preferred, is whether the company choose to purchase capital assets financed via debt or lease them. For example, a company with big capital assets financed via debt could note that the company would be more profitable if they sold them and leased them back. The company is now more profitable, and its reasonable to say its 'better', but its EV has gone down.

coolgeek 10y ago

> I think it is very meaningful because it (loosely) implies that the present value of Tesla's profits (i.e. net profit after tax) is higher than Ford's. Even on a risk-weighted basis. Or, at least, that's roughly-kinda-sorta what the market believes The "market" (albeit a more limited one) also believes that Uber is worth $70B - almost 1.5X the market cap of Tesla. How meaningful is that?

peterbonney 10y ago

> However, the interesting thing here is that Tesla has become more 'valuable' than Ford, for this definition of value. I think it's a very tortured definition of "value", though... I don't have a Bloomberg terminal in front of me anymore to check, but I'm guessing Ford's bonds are generally trading closer to par than zero. In which case the bondholders are telling you they think there is about $100 billion worth of additional value to Ford's business beyond the value of the equity. That's a really big piece of context to this story. I agree with you in principle that market cap is a perfectly valid metric, but when you're comparing a majority-equity company to a majority-debt company (assuming the bonds are valued as non-distressed assets) it ignores something very, very significant.