Volkswagen vs Tesla: Clash of Extremes

On one side you have the grandmother, VW, from 1937, on the other you have the irreverent grandson, Tesla, from 2003. It is the clash of experience against youth, but also of old Europe against America. Trump, or rather his old "friend" (he has a lot of them, I mean old ones). It's also a clash of styles, with one mature company versus another growing one (at least until his ketamine-addled boss decides to get into politics).

The contradictions don't end there, quite the contrary. Financial reporting data is particularly revealing: on the one hand, we have Volkswagen, the second-largest carmaker in the world after Toyota; on the other, Tesla, which dominates the sector in terms of market capitalization, even ranking eleventh across all industries. This situation inevitably raises questions: how can we explain that a manufacturer that produces fewer vehicles than its competitor is valued more highly on the stock market? There is clearly reason to wonder...

Valorization

When a company increases production, it generally expects a corresponding increase in sales. Otherwise, unsold surplus stock accumulates in inventory, ultimately creating inventory management difficulties. Thus, the vehicles actually sold contribute directly to the company's increased revenue.

Market capitalization is influenced by the number of shares outstanding and their market price. The more expensive a stock is, the higher its market capitalization. It's mathematical.

One way to estimate a company's valuation is to compare the stock price to the revenue generated per share. This is known as the P/S ratio (Price-to-Sales). For Volkswagen, this ratio rises to 0.14. A single Volkswagen share, at the current price of 92.40 euros, is equivalent to 660 euros in revenue. From this perspective, it's clearly a bargain. This is significantly lower than the ratio for the European car industry, which is already at a particularly cheap level (0.38). It's also one of VW's all-time records. The last time the ratio was this low was about twenty years ago. The share price subsequently rose sharply, before falling again during the subprime crisis.

Tesla's P/S ratio is 11.60. That's almost 100x higher. It's also nearly 10x higher than the North American auto industry average. Note that this isn't Tesla's worst P/S ratio historically, as it even climbed to 25.95 in 2021. We wouldn't go so far as to say it's a bargain today, far from it.

To put this in perspective, Volkswagen's revenue is currently nearly four times that of Tesla. Given that its valuation is 100 times higher, this means that to reach an equal valuation, Tesla would have to sell as much as 25 Volkswagen companies combined. Tesla would need 20 years to catch up with Volkswagen's sales, based on VW's current average annual sales rate of 5% over the past five years, and Tesla's 31%. In fact, it may take much longer, given the latest figures (over the past 12 months, growth has been only 1%).

The same conclusion is reached when looking at price to book value. Volkswagen is being sold off, with a price-to-book of 0.28. You can buy the German company's assets at a discount of 72%! Again, this is significantly less than the European auto industry (0.91). In fact, it's the lowest ratio in the last twenty years.

On the contrary, Tesla trades at nearly 15 times its book value. This is more than ten times the ratio of the North American auto industry, but it is not a record, as in 2013 this ratio rose to 73 times its book value!

From a price-to-earnings (PE) perspective, Volkswagen is currently trading at just 5 times earnings, compared to an average of 14 for the entire European auto industry. Tesla, on the other hand, has a PE of 173, compared to the North American auto industry average of 15. It should be noted that this is not a record for Tesla, whose PE reached as high as 1,690 in 2021. Again, we wouldn't go so far as to say that this is a real opportunity today.

Cisco, in the late 1990s, was also very popular, as the spearhead of the "New Economy." In 1996, the stock was trading at nearly 500 times earnings. By 1997, the stock was valued like Tesla's today, at nearly 170 times earnings. Three years later, it began to plummet, and its price fell tenfold in just two years. Twenty-three years later, it still hasn't caught up.

Here is the paradox: Volkswagen produces much more than Tesla but its stock is sold off, while that of the baby of Musk is at the same stratospheric levels as its rockets... before they explode. The German manufacturing giant therefore seems almost small compared to Tesla when we look at their market capitalization. But let's not kid ourselves: from the point of view of its market value, Tesla is a giant with feet of clay, like Cisco was in the 90s.

This doesn't mean that the Texan company doesn't have any strengths, as we'll see next. However, the price to pay for these assets is far too high. Especially since Tesla doesn't pay any dividends, unlike VW, which offers a generous yield of 6.7%, even though it maintains a distribution ratio reasonable of 62%.

Quality

The operating margins of both manufacturers are at similar levels, around 7%. Both are performing better than their respective industries. However, Tesla has a higher return on equity (last 12 months), at over 9% compared to less than 6% for VW.

From a debt perspective, Tesla has made significant progress since 2012, going from a debt-to-equity ratio of 7 in 2012 to just 0.18 today. VW's situation is a little less positive, although it's also moving in the right direction, going from a ratio of 2.6 in 2006 to 1.55 today.

However, Tesla's significant debt reduction should be put into perspective. Indeed, the American company has issued a significant amount of new shares since its IPO in 2012. In the last five years alone, these shares have increased by $401 billion. In other words, each Tesla shareholder's share of the pie is gradually shrinking. Conversely, VW has not issued any new shares over the same period.

Thanks to this debt reduction, financed by the issuance of new shares, Tesla is easily able to meet its interest payments, posting an EBIT/interest expense ratio of 19.4, compared to only 8.5 for Volkswagen. Elon Musk's company therefore presents a very limited risk of bankruptcy, which is reflected in an excellent Altman Z-Score of 13.9, significantly higher than that of Volkswagen, which only reaches 1.09. This more delicate situation for the German manufacturer may also explain the discount it is subject to on the markets, reflected in a higher risk premium.

However, if we consider another qualitative indicator such as the Piotroski F-Score, Volkswagen takes the lead this time, obtaining a score of 6 against 5 for Tesla. The main distinction lies in the fact that the Piotroski F-Score does not only analyze current data, but also takes into account its recent evolution. This approach can be particularly relevant when evaluating a company in the recovery phase. Furthermore, and this is a key point here, the Piotroski F-Score incorporates the impact of the issuance (or not) of new shares into its calculation.

To strengthen this argument, it should be noted that the Piotroski F-Score has stood out in numerous studies for its effectiveness in stock market performance and risk reduction, a finding that is less evident with regard to the Altman score.

Growth

Although Tesla is no longer considered a startup, it is still a relatively new company. These young companies are generally expected to initially deliver strong sales growth, and eventually profit growth. The Texas-based company has been no exception. Since its IPO, Tesla has enjoyed years of significant revenue growth, while its results remained in the red for a long time, before turning positive in 2020. However, last year, both sales and profits began to stagnate or even decline. Over the past twelve months, earnings per share have halved, having previously grown at an average annual rate of over 30% over the previous five years.

Volkswagen also saw a decline in its profits over the past twelve months, but slightly less pronounced, with a loss of -38%. However, as growth has been much more sluggish in recent years, this was enough to push the average annual growth over the past five years into negative territory, at -4,29%. This also explains the undervaluation of the German stock.

Momentum

Over the past twelve months, the momentum has clearly been in Tesla's favor, with its share price increasing by 36%, despite the correction since the beginning of the year. That's still 22% more than the US S&P 500 index.

VW is having a much harder time. The stock fell by -171tn, or 221tn less than the MSCI Europe index.

Verdict

In the end, what can we learn from this duel between German experience and American passion?

Volkswagen, a historic pillar of the global automotive industry, offers a seemingly absurd valuation, as it is so low compared to its fundamentals: its stock is trading at historically low levels, while the company provides a comfortable dividend and maintains a significant global position in terms of volume. In contrast, Tesla crystallizes all the expectations of a market hungry for disruption and dazzling growth, to the point of seeing its share price reach dizzying heights in capitalization. Its stock performance places it as the darling of investors, but it comes with a very real risk of overvaluation in the face of slowing growth and profitability that has been slow to materialize.

The comparison between the two highlights the paradox of the moment: the discount of a solid and profitable giant, although losing speed, compared to the premium of a star full of promise, but not without intrinsic fragilities, notably in its capacity to maintain a high rate of growth, which was predictable.

In light of current ratios, Volkswagen looks like a neglected bargain, while Tesla is akin to a highly speculative bet on the future. The coming years will be a balancing act between the patience of value investors and the sometimes blind enthusiasm of those who embrace "growth at all costs." Stock market history has often favored those who know how to measure their optimism...

As you can see, between the two, my heart naturally swings towards VW. Shares overlooked by the market tend to be particularly sought after when results exceed analysts' forecasts. This is starting to be the case for the German company. Last quarter, earnings per share exceeded expectations by $431.3 billion. This hasn't yet had an impact on the price, but another positive surprise could well shake things up, especially since analysts' profit forecasts continue to be rather pessimistic. Conversely, Tesla has tended to create negative surprises lately, which is never good for a growth stock, on which high expectations are high.

With VW, you're clearly getting your money's worth. The stock is very cheap relative to its earnings, revenue, and book value. The stock is being shunned by investors. However, it's not a stock you could buy with your eyes closed and let sit in your portfolio for several years without worrying. Debt is still quite high, despite recent progress, and the Altman score tells us that VW isn't rock-solid financially—far from it. Especially since the company is struggling to grow its earnings per share. All of this is reflected in VW's share price, which is currently showing clearly unfavorable momentum, even as the market pushes upward.

The automotive industry is also a highly competitive sector, with many established players and, above all, several newcomers, particularly Chinese ones, heavily subsidized by their governments. Innovation is currently a major challenge, requiring resources, brains, and competent and visionary executives. It is highly likely that in the more or less near future, many players in this industry will have disappeared, or will be doing something else...