Tuesday, April 11, 2017

GM Is Twice As Valuable As Tesla: Confusion In The Media Between Market Capitalization And Enterprise Value

The broadcast and print news media is reporting that on Monday, April 10, Tesla surpassed General Motors as the most valuable US auto company. For example, to cite just two, see The Wall Street Journal article, "Tesla Rivals GM as the Most Valuable Auto Maker in U.S." and the New York Times article, "G.M. Takes a Back Seat to Tesla as America’s Most Valued Carmaker."

Tesla's market capitalization (equity common stock outstanding times per share price) did surpass General Motor's market capitalization during the day on Monday. Market capitalization is only one of several components of a company's total value.

The total value of a company depends on a company's choice of capital structure. Different companies have different capital and financial structures that include the use of varied financial instruments, such as common stock, preferred stock, short-term and long-term debt and bonds (usually netted against cash holdings), and other funding and investment vehicles.

The inclusion of the value of all sources of funding, investment, and ownership is called Enterprise Value.

The Entreprise Value of Tesla is $55.7 billion, according to Yahoo.

The Entreprise Value of General Motors is $113.9 billion, according to Yahoo.

GM's total value is over 2 times the total value of Tesla.

To use a commonplace, everyday example to understand the difference between the two values, equity and total values, consider the following. Two buyers are looking to purchase a home. Buyer A buys a $400,000 house with a 10 percent, $40,000, downpayment and a $360,000 mortgage. Buyer B buys a $$360,000 house with a 20 percent, $72,000, downpayment, and a $288,000 mortgage.

Buyer A has $40,000 equity in the purchased house.

Buyer B has $72,000 equity in the purchased house.

Does buyer B have the more valuable house because they have more equity, $72,000 versus Buyer A's equity of $40,000?

Of course not. A $400,000 house is more valuable than a $360,000 house. The capital structure of the purchase does not change the value of the houses.

With GM being the older of the two companies and the company with more capital investment in mass production facilities, it is not surprising that Tesla, a newer company, producing many fewer vehicles than GM could have a higher amount of equity, common stock, value and much less debt than GM. Tesla has a very small amount of debt for a company in a capital intensive industry, such as the auto industry. As Tesla matures and expands its production capabilities, it will grow its vehicle market share by taking on more debt.

When both companies have similar production capacity and likely a more similar capital structure, then a more comparable comparison of value will be able to be made. Until then, GM's total (enterprise) value is twice that of Tesla's.

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