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It is just not true that Tesla is worth more than GM in the common understanding of that. The real answer to "Why Tesla is Worth More Than GM" is one sentence:

It is just not true that Tesla is worth more than GM in the common understanding of that. The real answer to "Why Tesla is Worth More Than GM" is one sentence: GM has more debt than Tesla. People understand (and the article gives reasons why) "worth more than" to be that the GM brands + factories + assets + future prospects are worth less than Tesla brands + Tesla factories + Tesla assets + Tesla future prospects. But this is not true in actuality. This is because Tesla is worth more than GM based on Market Capitalization, not Enterprise Value. The difference between these companies is that GM has $51B in net debt while Tesla has $2.6b. If GM wanted to be "worth more than Tesla" (using market cap), they could do it tomorrow by issuing $51B in new stock and paying off their debt. Why doesn't GM do this? Because they actually believe their stock is undervalued, and would rather buy their own stock than sell it. Debt (leverage) is different across different companies. If you aren't familiar with how different debt levels affect the market cap, the following pages are worth a read: https://medium.com/@ruzbehb/tesla-is-not-valued-at-more-than-general-motors-and-ford-hint-enterprise-value-c89c2d21222e https://medium.com/@ruzbehb/tesla-is-not-valued-at-more-than... http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/debt-effects-capital-structure.asp http://www.investopedia.com/exam-guide/cfa-level-1/corporate... http://www.investopedia.com/terms/l/leverage.asp http://www.investopedia.com/terms/l/leverage.asp

adventured 9y ago
Your premise is entirely wrong. GM has positive $37 billion in net tangible assets. That has climbed from $27b, to $33.9b, to $37b over the last three fiscal years. Their net balance sheet is not only improving, it's dramatically in the positive. To go with that, they have $24 billion in cash and are currently capable of earning around $12 billion in net income on an annualized basis (meaning they can easily afford the debt they have just on an income basis). GM's balance sheet is in dramatically better shape compared to market capitalization vs Tesla. To make matters worse for Tesla, they're still bleeding immense red ink vs sales, having to regularly either raise debt or dilute shareholders to keep operating (GM doesn't have that problem, and doesn't need to eat its balance sheet to operate). That by itself tells you everything you need to know about Tesla vs GM when it comes to balance sheet vs market cap. Tesla is worth more than GM for one reason: the potential to one day be more profitable than GM, namely that enough shareholders are buying into that premise.
- tuna-piano 9y ago
  You may know much more about this than me. Is Enterprise Value too simple a calculation to compare the companies? (you seem to be looking at the entire balance sheet, not just cash/debt) Certainly GM could issue stock tomorrow to increase their market cap to be more than Tesla's? Market cap just seems a bit arbitrary of a metric (as it doesn't take into account cap structure) when you're comparing the value of the digital economy and digital monopolies, etc (as the article does).
  - adventured 9y ago
    > Certainly GM could issue stock tomorrow to increase their market cap to be more than Tesla's? That's not how it works. GM issuing shares tomorrow to raise cash, would not inherently boost the market cap. In fact, more likely given the context, shareholders would punish GM and push their valuation down. Shareholders would be spooked by such a move, they'd regard it as a bad sign for GM's operating picture. TSLA & GM are not being treated the same, or valued on the same basis. It's almost identical to the Walmart vs Amazon scenario in that sense. Cash is essentially never valued at a $1 to $1 basis in terms of representation in the market cap. It's discounted, as for numerous reasons it's not (and shouldn't be) worth 1 to 1 in practical terms. Debt is also frequently treated very differently from one company to another depending on the context. Comcast for example, has negative $59 billion in net tangible assets, and a mere $4 billion in cash (and most of their 'assets' are goodwill & intangibles); they have a terrible balance sheet. Yet their market cap is $181 billion, to go with $8 billion in net income. Shareholders, for various reasons, are giving Comcast a very sizable multiple and mostly ignoring the balance sheet (ie they don't regard it as a serious threat). GM has a vastly superior balance sheet, six times the cash, routinely ~50% higher quarterly net income, and yet is worth 1/3 what Comcast is.
    - davidf18 9y ago
      I believe that much of the difference between Comcast and GM are because of number of customers who are revenue generators and the barriers to competition that Comcast would have compared with GM. While there might be many loyal GM purchasers, (I don't know that metric), Comcast does have competition for cable TV (e.g., many who are "cutting the cord") but not so much as an Internet provider, AFAIK. GM's high revenue/profit vehicles require a lot of gas compared with the lower revenue/profit vehicles and thus the projected cost of gasoline probably is part of the GM valuation. For now, and for the future, thanks to fracking and (relatively) low demand from China, it appears as if GM should be having increased profits. Regarding, Tesla's valuation, there must be some metric for customer acquisition.
spectrum1234 9y ago
Except that the MARKET values GM's stock at...exactly what it is priced.
- deleted 9y ago
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- heifer2822 9y ago
  I'm not an expert on this but I think the point was market cap is the value of all outstanding shares. Tesla raised money through venture capital while GM raised money by going to the bank and getting a loan. Think about buying a $1M rental property. One guy gets 9 friends together and they each put up $100k for 10% of the house. The house/business is worth $1m. The market cap is $1m. Another guy wants to buy a $1m rental property but he goes to the bank and gets a $900k mortgage. The house is worth $1m but the market cap is only $100k. Since tesla and GM raised money very differently their market caps are not comparable.
  - coralreef 9y ago
    The house's market value is the same as its market cap. It would still be $1m in both cases. How it was raised is irrelevant; you won't find a buyer for less or more than $1m if that is its market price. GM and Tesla are both public market stocks. Regardless of how they raised previous capital, the market is valuing Tesla higher.
    - mcnamaratw 9y ago
      "The house's market value is the same as its market cap." That's because houses are quoted in total, not just the equity piece. Stocks are only the equity. (They could quote just the equity piece of houses. In that case it would be unhelpful to compare prices without checking the debt.)
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Animats 9y ago
Now that makes sense. The article is mostly generic new-economy blathering. We'll know in a few months if Tesla will be a success. For their Model 3, Tesla has to transition from being a high-margin low-volume manufacturer to a low-margin high-volume manufacturer. That's very tough. Few companies succeed at that. Already, the price of the Model 3 has crept up. The base vehicle is supposed to sell for $35K, but in practice most models will be around $45K with upgrades. Maybe higher. Overpriced upgrades are where the profit comes from in automotive. That may be how Tesla escapes fighting it out on cost with Chevy and Toyota.
mkx 9y ago
I've found this article to be the most helpful for understanding how net debt and equity come together to comprise EV: https://www.wallstreetprep.com/blog/common-topics-of-confusion-for-investment-banking-analysts/ https://www.wallstreetprep.com/blog/common-topics-of-confusi...

adventured 9y ago

Your premise is entirely wrong. GM has positive $37 billion in net tangible assets. That has climbed from $27b, to $33.9b, to $37b over the last three fiscal years. Their net balance sheet is not only improving, it's dramatically in the positive. To go with that, they have $24 billion in cash and are currently capable of earning around $12 billion in net income on an annualized basis (meaning they can easily afford the debt they have just on an income basis). GM's balance sheet is in dramatically better shape compared to market capitalization vs Tesla. To make matters worse for Tesla, they're still bleeding immense red ink vs sales, having to regularly either raise debt or dilute shareholders to keep operating (GM doesn't have that problem, and doesn't need to eat its balance sheet to operate). That by itself tells you everything you need to know about Tesla vs GM when it comes to balance sheet vs market cap. Tesla is worth more than GM for one reason: the potential to one day be more profitable than GM, namely that enough shareholders are buying into that premise.

tuna-piano 9y ago
You may know much more about this than me. Is Enterprise Value too simple a calculation to compare the companies? (you seem to be looking at the entire balance sheet, not just cash/debt) Certainly GM could issue stock tomorrow to increase their market cap to be more than Tesla's? Market cap just seems a bit arbitrary of a metric (as it doesn't take into account cap structure) when you're comparing the value of the digital economy and digital monopolies, etc (as the article does).
- adventured 9y ago
  > Certainly GM could issue stock tomorrow to increase their market cap to be more than Tesla's? That's not how it works. GM issuing shares tomorrow to raise cash, would not inherently boost the market cap. In fact, more likely given the context, shareholders would punish GM and push their valuation down. Shareholders would be spooked by such a move, they'd regard it as a bad sign for GM's operating picture. TSLA & GM are not being treated the same, or valued on the same basis. It's almost identical to the Walmart vs Amazon scenario in that sense. Cash is essentially never valued at a $1 to $1 basis in terms of representation in the market cap. It's discounted, as for numerous reasons it's not (and shouldn't be) worth 1 to 1 in practical terms. Debt is also frequently treated very differently from one company to another depending on the context. Comcast for example, has negative $59 billion in net tangible assets, and a mere $4 billion in cash (and most of their 'assets' are goodwill & intangibles); they have a terrible balance sheet. Yet their market cap is $181 billion, to go with $8 billion in net income. Shareholders, for various reasons, are giving Comcast a very sizable multiple and mostly ignoring the balance sheet (ie they don't regard it as a serious threat). GM has a vastly superior balance sheet, six times the cash, routinely ~50% higher quarterly net income, and yet is worth 1/3 what Comcast is.
  - davidf18 9y ago
    I believe that much of the difference between Comcast and GM are because of number of customers who are revenue generators and the barriers to competition that Comcast would have compared with GM. While there might be many loyal GM purchasers, (I don't know that metric), Comcast does have competition for cable TV (e.g., many who are "cutting the cord") but not so much as an Internet provider, AFAIK. GM's high revenue/profit vehicles require a lot of gas compared with the lower revenue/profit vehicles and thus the projected cost of gasoline probably is part of the GM valuation. For now, and for the future, thanks to fracking and (relatively) low demand from China, it appears as if GM should be having increased profits. Regarding, Tesla's valuation, there must be some metric for customer acquisition.

spectrum1234 9y ago

Except that the MARKET values GM's stock at...exactly what it is priced.

deleted 9y ago
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heifer2822 9y ago
I'm not an expert on this but I think the point was market cap is the value of all outstanding shares. Tesla raised money through venture capital while GM raised money by going to the bank and getting a loan. Think about buying a $1M rental property. One guy gets 9 friends together and they each put up $100k for 10% of the house. The house/business is worth $1m. The market cap is $1m. Another guy wants to buy a $1m rental property but he goes to the bank and gets a $900k mortgage. The house is worth $1m but the market cap is only $100k. Since tesla and GM raised money very differently their market caps are not comparable.
- coralreef 9y ago
  The house's market value is the same as its market cap. It would still be $1m in both cases. How it was raised is irrelevant; you won't find a buyer for less or more than $1m if that is its market price. GM and Tesla are both public market stocks. Regardless of how they raised previous capital, the market is valuing Tesla higher.
  - mcnamaratw 9y ago
    "The house's market value is the same as its market cap." That's because houses are quoted in total, not just the equity piece. Stocks are only the equity. (They could quote just the equity piece of houses. In that case it would be unhelpful to compare prices without checking the debt.)
  - deleted 9y ago
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deleted 9y ago

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Animats 9y ago

Now that makes sense. The article is mostly generic new-economy blathering. We'll know in a few months if Tesla will be a success. For their Model 3, Tesla has to transition from being a high-margin low-volume manufacturer to a low-margin high-volume manufacturer. That's very tough. Few companies succeed at that. Already, the price of the Model 3 has crept up. The base vehicle is supposed to sell for $35K, but in practice most models will be around $45K with upgrades. Maybe higher. Overpriced upgrades are where the profit comes from in automotive. That may be how Tesla escapes fighting it out on cost with Chevy and Toyota.

mkx 9y ago

I've found this article to be the most helpful for understanding how net debt and equity come together to comprise EV: https://www.wallstreetprep.com/blog/common-topics-of-confusion-for-investment-banking-analysts/ https://www.wallstreetprep.com/blog/common-topics-of-confusi...