In the following analysis, we take a look at why Tesla (NASDAQ:TSLA) could be an attractive acquisition target for Google (NASDAQ:GOOG). We break down our analysis into three parts: what Tesla would stand to gain, what Google would stand to gain, and a scenario where Tesla’s value could rise to $1.5 trillion aided by a deal with Google.
What Tesla would stand to gain:
- Google’s software muscle and large cash pile increase Tesla’s chances of executing well in a larger space.
- We outline a case with Google as Tesla’s parent. This could see Tesla grow 10x from its current market cap of close to $150 billion to $1.5 trillion by scaling its production and deliveries to about 8 million units (approaching VW & Toyota) while monetizing its self-driving technology more broadly by licensing it to other auto-makers.
- Considering that Tesla stock has soared past $900 from ~$500 in less than ten days, and all of this after an already surprising rise from the lows of below $200 less than a year ago, we believe the outliers are not so difficult to imagine.
- In this analysis, we remind investors of risks in the stock, as-well-as provide additional color to the upside case, tying our two outliers analysis together.
Related Analysis: Tesla Stock Upside: $2,000? and Tesla Stock Downside: $0?
What Google would stand to gain:
- Google needs to grow revenues, and cars are a huge market, with roughly 90 million sold per year. Moreover, selling self-driving cars and software is right up until Google’s alley, and Tesla is a leader by far in this space.
- Google has the financial muscle to undertake an acquisition of this size, given its $1 trillion market cap, ~$120 billion in cash reserves and free cash flows of over $20 billion a year.
- If Google paid a 50% premium over Tesla’s current market cap of close to $150 billion, this would value Tesla at $225 billion. While this is a large sum to pay for a company that has yet to turn an annual profit, the upside may be substantial, as we detail below.
For more details, view our interactive dashboard analysis Here’s Why Tesla Is Worth $1.5 Trillion To Google.
Tesla could potentially be worth $1.5 trillion to Google
#1. Tesla Automotive Deliveries: Deliveries could scale up to 8 million units if Tesla moves beyond the luxury car market
- While deliveries are likely to grow to close over 500k units this year, deliveries can potentially increase to over 2.7 million cars by 2025 and 8 million cars by 2030.
- We estimate Tesla’s Deliveries to have a CAGR of 58% over 2015-20.
- It is possible for the annual delivery growth figure to be 40% over 2020-25 and 25% over 2025-30 if Tesla increases its presence in the mass market by launching new vehicles at price points below the Model 3 and Model Y.
- You can modify the growth rate in the below charts to arrive at your own estimates for 2025 and 2030 figures.
#1.1 Why Tesla’s Deliveries jumping to 2.7 million by 2025 and 8 million by 2030 is not a far-fetched idea
- Top auto manufacturers Volkswagen Group and Toyota delivered 11 million and 9 million cars, respectively, in 2018.
- As the market industry moves increasingly towards electric vehicles, Tesla could move beyond the luxury auto market by launching more mainstream vehicles and ramping up production.
- Tesla also has a solid track record of scaling up its production. Deliveries rose from about 2k cars in 2012 to 367k in 2019. The company also built out its Chinese factory in a record ten months, and production is expected to scale from a run-rate of 250k cars per year by the end of this year to 500k cars soon.
#2. Tesla Self Driving Software Business
- Tesla already offers the full self-driving software upgrade to Tesla owners at $6k per vehicle, and the company’s autonomous driving tech is viewed as being superior to the broader industry.
- As the technology matures and garners greater acceptance, Tesla could license out the software/technology to other automakers.
Much like the Internet industry, self-driving is a data-driven business, and the market is likely to concentrate around 2-3 large players. - If we assume that Tesla can license its tech to 30% of all cars sold by 2030 at a rate of $3k per vehicle, this could translate into revenues over $84 billion.
#3. Tesla Total Revenues:
- If Tesla manages to ramp up automotive deliveries as detailed above while creating a fast-growing Self Driving Software business, Total Revenues could potentially grow to $151 billion in 2025 and $460 billion by 2030.
#4. Tesla Net Income: The strong revenue growth will need to be accompanied by steady improvement in margins, with Tesla’s Net Margins growing to 13.5% in 2025 and 15% by 2030
#4.1 Tesla’s Net Profit Margins could be higher than rivals such as BMW, as it increases its mix of software revenues
- An increasing share of high-margin software sales could help its overall net margins despite the negative impact of a growing proportion of mass-market cars in its margins.
- Moreover, Tesla’s direct sales model (which bypasses traditional auto dealerships) should also help its margins. For perspective, Automotive retailers typically have net margins of over 3.5%.
#5. Tesla Valuation: Tesla could be worth $1.5 trillion to Google by 2030 if it is valued at 20x earnings
- For perspective, Google presently trades at about 24x, with revenue growth of about 20%-23%, and margins of a little over 20%.
- Apple trades at about 20x, with revenue growth averaging less than 5% and margins standing at over 20%.
View a range of Trefis research, including Tesla’s battery cost analysis, to self-driving business potential, and all our Tesla analyses.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
