Last week was exciting for Tesla — $200 billion in additional value was created from $4 billion of incremental revenue in only five trading days.

In summary, here’s what drove the increase:

• Event: rental car company Hertz placed an order for 100,000 Tesla vehicles by the end of 2022
• Financial impact: roughly $4bn of incremental revenue to Tesla
• Valuation impact: more than $200 billion added to Tesla’s already-extravagant market cap.

Bear in mind that Tesla’s strong third-quarter 2021 results (released about a week before the Hertz announcement) only managed to add a paltry $45 billion of market cap in the days that followed.

To give last week’s figures some context:

• If the $200bn of value that was added to Tesla’s market cap in those five trading days was its own company, it would already be the 65th largest listed stock in the world
• This brand-new company would already be more valuable than McDonald’s (which has spent the last 65 years building a market cap of “only” $182 billion)
• And its market cap would already be around 1.5 times larger than other global powerhouses such as Unilever, Sony, BHP, Citigroup, Starbucks and Boeing.

Within the world of autos, NewCo on its own:

• Would be worth 1.4 times more than the whole of Volkwagen AG (which, across its VW/Audi/Porsche/Skoda brands, is already selling roughly half as many EVs as Tesla — the whole company, not just NewCo! — each quarter)
• And NewCo’s market cap would be enough to buy you the whole of General Motors plus the Ford Motor Company plus Hyundai Motor Co (with around $10bn of change left over to play with).

Whichever way you look at it, the creation of that much value on the back of that sort of news is simply mind-blowing. Especially when you consider that Tesla’s main constraint has always been supply, not demand.

In other words, if Hertz wasn’t there to buy those 100,000 new vehicles over the next 14 months, the vehicles in question would simply have been bought by someone else.

This means that, in true economic terms, the $4 billion figure associated with the Hertz announcement shouldn’t even be counted as “incremental” revenue to Tesla.

We’ve also been amused to come across statements like this one, from Reuters:

“Hertz’s decision to order 100,000 Tesla vehicles by the end of 2022 showed that electric vehicles are no longer a niche product, but will dominate the mass car market in the near future.”

Really? The market was already valuing Tesla stock at $900bn before the Hertz announcement, but it still needed to be convinced that electric vehicles are going mainstream?

Tesla is superb but valuation matters

At Pella Funds Management, we have enormous respect for what Elon Musk has already achieved (and will no doubt continue to achieve).

However, while Tesla scores highly on two of our three investment pillars (secular growth and ESG credentials), we will never ignore our third pillar, reasonable valuation, particularly when we are able to find attractive “price for growth” opportunities (with positive ESG credentials) elsewhere in the market.