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Why Tesla Has Just Become the World's Most Valuable Car Company by Market Cap

Better-than-feared U.S. conditions, strong Chinese Model 3 demand and an influx of new retail investors all appear to be playing roles.

By any standard, Tesla’s  (TSLA) - Get Tesla Inc Report current valuation represents uncharted territory for an automaker of its size.

As of the time of this article, Elon Musk’s company sports a $208 billion market cap and (after accounting for close to $6 billion in net debt) an enterprise value (EV) of around $214 billion. While Toyota Motors  (TM) - Get Toyota Motor Corp. Report still has a slightly higher EV, Tesla is now the world’s most valuable automaker in terms of market cap.

With the qualifier that it’s tough to forecast exactly what a company such as Tesla will earn a year or two down the road, Tesla now respectively trades for 86 times and 58 times its 2021 and 2022 non-GAAP consensus EPS estimates of $12.98 and $19.43. Likewise, its EV is equal to 58 times a 2022 consensus free cash flow (FCF) estimate of $3.7 billion.

These sky-high multiples are the end result of a furious rally in Tesla’s stock from its March lows. Shares are now above $1,100, up 213% from a March 19 low of $358.46, and up 432% from a 52-week low set in August 2019. These gains have come even though the auto industry at-large is having a very rough time right now, thanks to the COVID-19 pandemic’s impact on both auto production and demand.

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A few different factors appear to have fueled Tesla’s manic rally since March:

  1. Tesla’s massive Fremont, CA auto plant reopened in mid-May, sooner than what many expected.
  2. With the help of massive fiscal stimulus actions and the Fed’s interventions, the U.S. macro environment (though still quite weak in many ways) hasn’t deteriorated as much as had been feared.
  3. Relative to many other automakers, Tesla’s bottom line appears to have held up well over the last few months. Musk recently suggested Tesla might have broken even in Q2.
  4. With the help of a Model 3 production ramp at its Shanghai Gigafactory, Tesla has been seeing strong demand in China.
  5. Tesla -- like so many other high-growth, high-beta Nasdaq-listed names -- has benefited from both the impact of the Fed’s liquidity injections into financial markets and a surge in retail trading activity. According to website Robintrack, the number of Robinhood investors with a position in Tesla has risen by more than 200,000 since the start of the year, and is currently above 323,000.

Regardless of how much one attributes Tesla’s surge to one particular factor or another, it’s fair to say that -- ahead of a Q2 deliveries report that could arrive tomorrow -- the company is pricing in quite a lot of future sales and profit growth, and is doing so at a time when there’s still quite a lot of near-term macro uncertainty.