Tesla or Apple: Which Is A Better Buy?

by Trefis Team
Tesla Motors
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Tesla (NASDAQ: TSLA) and Apple (NASDAQ: AAPL) are a lot alike than you would think despite being key players in completely different industries. Tesla designs and makes the body as well as the software that runs its Model 3, Model S, and other vehicles. Similarly, Apple likes to control its iOS operating system and the design of its device hardware. Apple’s iPhones, iPads, Watch are all iconic for their physical design and their incredible user experience. Both companies are known to think differently, challenging the status quo.

Perhaps the most remarkable parallel: Tesla’s Elon Musk is as much a defining force for Tesla as the late Steve Jobs was for Apple.

However, the two companies could not be more different in terms of other measures.

You might ask: should I buy Tesla’s $26 in annual revenue per share for a price of close to $400 (i.e., a Price to Sales multiple of close to 15x), or am I better off with Apple’s P/S of about 7x – less than half of Tesla’s figure? In fact, Tesla’s current P/E at close to 200x (based on earnings over the last four quarters) is way higher than Apple’s P/E multiple of 33x. But is that enough to conclude Tesla is more expensive than Apple? Not really. We think it depends on your time horizon and risk appetite.

Tesla’s revenue growth is much higher (55% average annual revenue growth over the last 3 years vs. about 6% for Apple). However, Tesla’s returns are lower. Specifically, Tesla wasn’t profitable on a GAAP basis in 2019, and over the last 4 quarters, Tesla’s Net Income Margin (Net Profits as a percent of Revenue) stood at under 2%. Using another measure of return, Tesla’s Operating Cash Flow margins (Cash generated from day to day operations divided by Revenues) of under 10% are well below the 27% posted by Apple.

That said, Tesla’s return metrics are getting better, while Apple’s are staying flat or declining. In fact, let’s step back to look at the fuller picture based on Revenue Growth, Returns (ability to generate profits from growth), and Risk (sustainability of profits) for the two companies.

See our dashboard Tesla vs. Apple: Is TSLA Stock Appropriately Valued Given It’s lower P/S Multiple Compared to AAPL?, parts of which are summarized below.

1. Revenue Growth

Tesla, with revenue of $26 billion over the last 4 quarters, is a baby about a tenth of Apple’s size. Apple’s revenues over the last 4 quarters were $274 billion. Of course, Tesla’s growth has been way higher than Apple’s over the last three years, with Tesla’s Revenue expanding at an average rate of 55% per year (from $7 billion in 2016 to $24.6 billion in 2019), versus about 6% for Apple (from about $216 billion to about $260 billion in the same period). 

  • Tesla’s growth is driven by the launch of new electric vehicles such as Model 3 and Model Y and fueled by the opening of new factories, for example, the one in Shanghai. Apple, on the other hand, has benefited from expanding revenues from digital services such as Apple Music and iCloud and wearable products such as AirPods and the Apple Watch, although sales of its flagship product, the iPhone has remained lackluster. (related: Apple Revenue: What’s Big & What’s Changed?)
  • Now, the low-interest-rate environment following Covid-19 along with government stimulus has made investors take a longer-term view – valuing higher growth companies more richly. This partly explains the 4.5x jump in Tesla’s valuation this year to over $350 billion. Apple’s stock has also jumped by about 40% so far this year, with the market cap standing at about $1.9 trillion. 


2. Returns (Profits)

Coming to Returns, Tesla is barely profitable, while Apple, with Net Income Margins exceeding 20%, is an icon of profitability. Apple is not only a more mature company but also has a relatively asset-light business model, giving it a clear edge over Tesla.

  • Tesla’s Operating Cash Flow margins stood at about 10% in 2019, up from -2% in 2016. In contrast, the metric stood at 27% for Apple in 2019, down from around 31% in 2016.
  • Tesla’s Return on Invested Capital (ROIC) – which is Net Income divided by total Equity and Debt – was (-4)% in 2019, compared to Apple’s ROIC of about 21%.

Tesla’s return metrics should continue to improve as delivery volumes continue to scale up, the company’s past research and product development spending start to pay off, and its increasing emphasis on software boosts margins. (related: How Do Tesla’s Software Sales Impact Its Gross Margins?)


3. Risk

While both Tesla and Apple are well-capitalized, Apple’s incredible cash pile in excess of $190 billion makes Tesla look like the riskier of the two companies from the perspective of financial leverage.

  • Tesla’s Debt to Equity – which is the ratio of total Long and Short-term Debt to Market Cap – currently stands at about 4% based on Q2 debt figures. Apple, which has bolstered its debt in recent years taking advantage of low-interest rates, has a Debt to Equity ratio of about 6%.
  • Apple had over $190 billion in cash at the end of its most recent quarter, with a Cash to Total Assets ratio of about 60%. In comparison, Tesla’s cash position stood at about $9 billion in the most recent quarter, with a Cash to Total Assets ratio of about 20%. Since its last earnings report, Tesla has raised another $5 billion via a stock offering, which should provide the company with an additional cash cushion.

But there’s more to the risk story. Tesla’s P/S multiple has swelled from just 3x at the beginning of the year to its current level of 15x. The metric has risen for Apple too, from 5x to 7x – as we detail in our dashboard about Tesla vs. Apple. In other words, the market sees much less risk to Tesla being able to generate Apple-like profits – soon! Also, at these higher valuations, Tesla should be able to raise more equity capital and reduce risk without significantly diluting out shareholders, as demonstrated by its recent $5 billion raise.


The Net Of It All

The Apple story is simple. Customers buy an iDevice, get hooked to Apple’s device and services ecosystem, and keep coming back to Apple for more, powering its cash machine. If Apple’s Revenue growth picks up, there is an upside, but that’s not trivial with $270 billion sizes! If revenue growth stays low, there is a small upside, or even a possible drop if multiples shrink.

The Tesla investment thesis, on the other hand, is a little more complicated. Sure, Tesla sells cars, and it is doing so more efficiently. But investors really see Tesla as a bet on the future of transportation. The stock makes sense at current valuations if you have high conviction in Tesla’s massive self-driving leadership, its ability to scale up its software-as-a-service sales, or if you think that the most important Tesla metric is Tesla’s Time Horizon.

How could things play out? If Tesla’s margins expand, the valuation multiple isn’t just going to shrink to keep the stock where it is. Revenue growth continues, margins expand to the 15% levels, the stock is likely to grow 3-5x. Of course, it is uncertain if and when margins will expand. But if Tesla continues to execute well, it’s a real possibility.

While the EV space offers high growth, what if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus less than 50% for the S&P 500. Comprising companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.


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