Tuesday, March 28

Will Tesla Be the Next Netflix? It Could Be Another Google.

is rapidly becoming the king of the side hustle. It is a conglomerate of many, many business ideas that are funded by a ultradominant core operation.

(ticker: TSLA) bulls believe the other businesses are a good thing, while bears have their doubts. Who is right isn’t all that important to the stock price—as long as the core business stays healthy—but CEO Elon Musk’s willingness to put money and time into other areas could affect how long that remains the case.

(NFLX) and Alphabet (GOOGL) offer contrasting visions of what could happen to Tesla. Right now, Tesla is looking more like

one of the few businesses still worth more than Tesla’s $1.1 trillion market capitalization, with its own market cap of about $1.7 trillion.

Alphabet generated about $57 billion of sales in the fourth quarter of 2021. About $32 billion, or 56%, came from that little search bar on the internet. The services business, the Alphabet category that includes search and operations such as YouTube, brought in operating profit equivalent to 122% of the total for the company. Alphabet’s “other bets” and cloud business lost about $2.4 billion.

Cars are to Tesla as search is to Alphabet. About 90% of Tesla’s first-quarter revenue came from selling electric vehicles. And 101% of total gross profit was generated by the car business.

Tesla’s other businesses include established products like solar roofs and battery backup power systems for residential and utility consumers. Battery products are a valuable sideline, as YouTube is for Alphabet, but Tesla also has “other bets.”

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Musk wants to build a vehicle that is just for robotaxi applications and he is aiming to develop humanoid robots in a project called Optimus.

“Those who are insightful or listen carefully will understand that Optimus ultimately will be worth more than the car business, worth more than [self driving cars],” Musk said on Tesla’s fourth-quarter earnings conference call.

That is an astounding claim, yet there are other big estimates for other Tesla side hustles. ARK Invest portfolio manager Cathie Wood believes the robotaxi business at Telsa will generate $284 billion in sales and $151 billion in earnings before interest, taxes, depreciation and amortization, by 2026. That would make Tesla’s robotaxi business bigger than Alphabet was in 2021.

Not even all bulls agree with that assessment.

Future Fund Active ETF
(FFND) portfolio manager Gary Black likes Tesla stock, but his financial model ascribes no value to Tesla’s autonomous-driving technology.

He believes others will copy whatever Tesla produces, and that self-driving features will only help it to sell more cars for higher prices. Offering the technology will be a little like being one of the first car makers to include anti-lock brakes or side-curtain airbags—nontransformative features that drivers like, he believes.

That raises the possibility Tesla is making a mistake by focusing on robotaxis when it should be developing a new model. Bernstein analyst Toni Sacconagi says that Tesla is taking a risk by trying to fuel 50% annual growth in sales volume with only two lower-priced models, the Model 3 and Y. Being late to the game with a lower-priced EV could give competitors the chance to start catching up to Tesla.

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New Street Research analyst Pierre Ferragu isn’t as worried. He knows that Tesla needs a lower-priced car, but notes the company is selling all the vehicles it can make right now. That will continue for years, he believes, because EVs are expected to account for 40% to 50% of global light-vehicle sales by 2030, up from about 7% now.

Ferragu also points out that Tesla makes EVs far more profitably than others, giving it the best chance to develop a lower-priced car.

GLJ Research analyst Gordon Johnson, though, sees parallels between Tesla and

(NFLX). He believes that Tesla’s valuation multiple will collapse as growth slows, as happened to the video-streaming company on Wednesday. The stock dropped about 35% after management said subscribership fell last quarter and predicted more of the same..

“Similar to Netflix, Tesla just went ex-growth,” wrote Johnson Thursday. He thinks that sales in the second quarter will be flat or lower as supply-chain problems constrain Tesla production.

The key point is that the U.S. markets for EVs and streaming video in the U.S. are different. Few households have EVs, while most binge on Netflix.

That means Johnson’s concern that Tesla could wind up like Netflix could be an issue for another day. Ferragu, for his part, believes that as long as Tesla keeps selling more cars, the stock is safe: As long as the core is healthy, the side hustles are just fine.

Ferragu has the highest price target for Tesla stock on the Street at $1,580 a share. Johnson, long a skeptic on Tesla, has a target of $67.

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There is no counterpart to Johnson among the people covering Alphabet stock. All of the 54 analysts who follow the company rate the shares at Buy, compared with fewer than half at Tesla. The average Buy-rating ratio for stocks in the

S&P 500

is about 58%.

The reason for that gap in ratings isn’t simply a result of the companies’ different prospects. Because Alphabet, formerly Google, has always been a tech company, not many people who focus on value stocks have ever opined on it. The car business, on the other hand, hasn’t been a growth business for about 50 years, so the people who track Tesla are more focused on value. Traditional car investors and analysts really struggle with Tesla’s valuation.

Write to Al Root at [email protected]

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