How does Tesla get to US$8.5 trillion value? Robots, robotaxis and hope

[SAN FRANCISCO] How can Tesla become an US$8.5 trillion company? That is the market valuation the electric vehicle maker would have to reach to justify CEO Elon Musk’s new pay package announced last week.

Selling 100 million humanoid robots in a year could do it; creating a robotaxi network with more than 10 times the revenue of Uber might as well. And of course, investor hope is part of the equation.

Musk on Friday (Sep 5) was given a decade to expand Tesla’s US$1 trillion valuation into a company worth more than the combined current value of Nvidia and Microsoft, the two most valuable publicly traded companies in the world. If he succeeds, Musk, already the best-paid CEO in the world, would receive a trillion-dollar pay package.

Musk’s new pay package was granted on Sep 3, but it is subject to shareholder approval in November. The board showed how and where it expects Tesla to make its money by structuring Musk’s pay package around 12 milestones that are primarily based on products and profit, as well as market capitalisation. They target enormous increases in profit as Tesla rolls out its Optimus humanoid robots and a robotaxi fleet that it hopes will be more efficient than human-driven rivals. A lot depends on how investors value the company.

Tesla, for example, is valued as a growth stock, trading at around 75 times its earnings before interest, taxes, depreciation and amortisation, or Ebitda, even though its vehicle sales dropped last year and are likely to drop this year.

The payoff is astounding – and so are the goals. Gene Munster, managing partner at Deepwater Asset Management, broadly estimated that robotaxis and self-driving software could be worth a trillion US dollars of market cap each, with cars another half-trillion. “At the end of the day, the reason why this is going to work or not work really comes down to Optimus,” he said. “It’s a fairy tale, but it’s one that could actually happen.”

Musk has been betting the company on self-driving software and robotaxis for some time. Tesla currently has a small fleet of robotaxis – estimated to be about three dozen vehicles – in a part of Austin, Texas.

An early Musk milestone is to have a million robotaxis in operation. One of Tesla’s biggest fans, ARK Invest, predicted an even sunnier case well before the Musk pay package was announced. They see Tesla’s market capitalisation hitting US$7 trillion to US$10.9 trillion in 2029, with a Tesla robotaxi network bringing in between US$603 billion and US$951 billion of ride-hail revenue per year. Global ride-hailing leader Uber, by comparison, will have revenue of US$52 billion this year, according to LSEG.

Tesla would start off owning and operating a robotaxi network, which would eventually be taken on by another company, ARK forecast. Tesla’s share of the ride fare would be 40-60 per cent, double that of Uber, ARK said.

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ARK did not include a valuation for robots in its model, although it said that could become a US$24 trillion market.

Banking on bots

More recently, Musk has described robots as the future, saying the Optimus humanoid robot could account for 80 per cent of Tesla’s value eventually.

If Tesla’s future depends on Optimus, it will have to sell a lot of robots – maybe more than 100 million a year, according to Reuters calculations. If Tesla’s business was only robots, that 100 million figure is what it would take to hit the top Ebitda profit target, as specified in the Musk pay package, of US$400 billion.

Optimus is expected to be priced at around US$25,000 and Tesla’s current Ebitda profit margin is around 15 per cent. For twice the profit margin, Tesla would have to sell only half as many robots.

Ebitda this year is expected to be US$13 billion, according to LSEG, so Tesla has a long way to go.

Much will also depend on how investors calculate Tesla’s potential at the end of the decade-long pay package. If investors were to continue pricing Tesla at 75 times Ebitda, it would take US$113 billion in Ebitda for Tesla to reach a US$8.5 trillion valuation, or less than the profit goal Tesla has set in Musk’s pay package. That package has a top Ebitda of US$400 billion and a top market cap of US$8.5 trillion, a multiple of 21.

The US$400 billion target was “materially more aggressive” than Morgan Stanley’s predictions on Tesla’s auto, energy and robotaxi businesses, its analysts said in a note on Sunday, adding that it “would imply substantial contributions from Optimus and other AI robot end markets currently not in our forecasts.” Some investors welcomed the focus on the new products and said the proposed pay might help address what is ailing the company now.

“There are big operational hurdles that Tesla does need to accomplish,” said Will Rhind, CEO of global ETF issuer GraniteShares. “There are things that clearly need to be reversed, such as declining sales, et cetera. So, why not tie the CEO’s compensation to reversing some of those trends?” REUTERS