For a moment on Monday, Tesla was the most valuable U.S. car manufacturer.
Well, sort of.
Let’s back up a moment. News that Tesla surpassed Ford earlier in April caused a flurry of news stories, helping add even more hype to the company’s upcoming Model 3 launch in July. With Tesla jumping over General Motors on Monday, round 2 had begun.
It’s easy to see why this is news. Tesla is still primarily buoyed by future expectations and faith in CEO Elon Musk. Meanwhile, Ford and General Motors, stalwarts of the U.S. economy, are massive companies that are consistently selling vehicles. How can Tesla be worth more?
It has to do with the future, rather than the present.
Well, it’s worth looking at just what we mean when we say one company is more valuable than another. The most basic and oft-referenced way is to talk about a company’s market capitalization — literally how much a company is worth based on its stock.
The chart below shows the market capitalizations of Ford, General Motors, and Tesla over the past year. As you can see, Tesla has made a strong run since November 2016, while its competitors have stayed relatively stable.
There’s an important caveat to this. While market cap is the most accepted way to look at the value of companies, there’s also enterprise value, which takes a broader look at a company’s holdings including debt.
It’s not worth getting into the really wonky finance stuff (if you’re into that, the Financial Times tends to be the gold standard), but it is important when trying to understand just why Tesla, which has only delivered on a small fraction of the number of cars that Ford and GM do every year, is worth as much as it is.
In fact, by enterprise value, Tesla has been the most valuable U.S. automaker for quite a while.
Why? Because there is growing faith that Tesla is firmly ahead of its competitors in preparing for a very different automotive future.
The company once known for its high-end electric vehicles is now preparing for its entry into the more mainstream luxury market. Meanwhile, Tesla is arguably far ahead of its peers in self-driving technology thanks to more than a billion miles of data based off cars that are already on the road.
It will be years until Tesla becomes as big as Ford or GM in terms of total cars sold per year (if it ever happens). But Ford and GM have far more to do to prepare for the future than Tesla does — something that investors (as far as enterprise value does) have acknowledged for a while.