Your premise is entirely wrong.

GM has positive $37 billion in net tangible assets. That has climbed from $27b, to $33.9b, to $37b over the last three fiscal years. Their net balance sheet is not only improving, it's dramatically in the positive.

To go with that, they have $24 billion in cash and are currently capable of earning around $12 billion in net income on an annualized basis (meaning they can easily afford the debt they have just on an income basis).

GM's balance sheet is in dramatically better shape compared to market capitalization vs Tesla. To make matters worse for Tesla, they're still bleeding immense red ink vs sales, having to regularly either raise debt or dilute shareholders to keep operating (GM doesn't have that problem, and doesn't need to eat its balance sheet to operate). That by itself tells you everything you need to know about Tesla vs GM when it comes to balance sheet vs market cap.

Tesla is worth more than GM for one reason: the potential to one day be more profitable than GM, namely that enough shareholders are buying into that premise.

You may know much more about this than me.

Is Enterprise Value too simple a calculation to compare the companies? (you seem to be looking at the entire balance sheet, not just cash/debt)

Certainly GM could issue stock tomorrow to increase their market cap to be more than Tesla's?

Market cap just seems a bit arbitrary of a metric (as it doesn't take into account cap structure) when you're comparing the value of the digital economy and digital monopolies, etc (as the article does).

> Certainly GM could issue stock tomorrow to increase their market cap to be more than Tesla's?

That's not how it works. GM issuing shares tomorrow to raise cash, would not inherently boost the market cap. In fact, more likely given the context, shareholders would punish GM and push their valuation down. Shareholders would be spooked by such a move, they'd regard it as a bad sign for GM's operating picture. TSLA & GM are not being treated the same, or valued on the same basis. It's almost identical to the Walmart vs Amazon scenario in that sense.

Cash is essentially never valued at a $1 to $1 basis in terms of representation in the market cap. It's discounted, as for numerous reasons it's not (and shouldn't be) worth 1 to 1 in practical terms.

Debt is also frequently treated very differently from one company to another depending on the context. Comcast for example, has negative $59 billion in net tangible assets, and a mere $4 billion in cash (and most of their 'assets' are goodwill & intangibles); they have a terrible balance sheet. Yet their market cap is $181 billion, to go with $8 billion in net income. Shareholders, for various reasons, are giving Comcast a very sizable multiple and mostly ignoring the balance sheet (ie they don't regard it as a serious threat). GM has a vastly superior balance sheet, six times the cash, routinely ~50% higher quarterly net income, and yet is worth 1/3 what Comcast is.

I believe that much of the difference between Comcast and GM are because of number of customers who are revenue generators and the barriers to competition that Comcast would have compared with GM. While there might be many loyal GM purchasers, (I don't know that metric), Comcast does have competition for cable TV (e.g., many who are "cutting the cord") but not so much as an Internet provider, AFAIK.

GM's high revenue/profit vehicles require a lot of gas compared with the lower revenue/profit vehicles and thus the projected cost of gasoline probably is part of the GM valuation. For now, and for the future, thanks to fracking and (relatively) low demand from China, it appears as if GM should be having increased profits.

Regarding, Tesla's valuation, there must be some metric for customer acquisition.

@adventured

But certainly if the GM entity had $10B more cash tomorrow, it might not be worth $10B more, but certainly it would be worth $5-$10B more (or at the very least >0 more)?

And of course, they could use that $10B to pay off $10B of their existing debt as well.

All I'm trying to say is that you probably shouldn't compare market caps of companies with vastly different capitalization structures to try and deduce a bigger picture idea of the economy. You should look at enterprise value.

http://www.investopedia.com/terms/m/marketcapitalization.asp

http://www.investopedia.com/terms/e/enterprisevalue.asp

Equity valuation in the real world doesn't really work as in theory. But for what it's worth I don't think adventured is right and I find that your point about enterprise value being more meaningful than market capitalisation is mostly valid.

The "best" capital structure for GM has been widely discussed recently, see for example: https://www.bloomberg.com/view/articles/2017-03-28/hedge-fun...

> But certainly if the GM entity had $10B more cash tomorrow, it might not be worth $10B more, but certainly it would be worth $5-$10B more (or at the very least >0 more)?

No, again, that's not how it works. Shareholders value companies primarily based on a multiple of earnings with an overwhelming tilt toward future expectations, not based on cash. Cash can receive anywhere from a medium to a near-total discount, depending on the context & company. As an easy example: Apple's cash has stopped growing at the rate it used to (they're paying a lot of it out), while it has taken on immense debt in a short time, and its earnings have not expanded in years (in fact they've fallen as with sales, re fiscal 2016 vs fiscal 2015) - meanwhile, its stock has been given an increased multiple lately, AAPL is up 47% (adding $200+ billion in market cap, while earnings went down and debt went up) in the last year despite those theoretical negatives. Why? Shareholders mostly don't care about the accumulated debt or the slowdown in cash accumulation.

There are a few exceptions, for example if a company is under serious bankruptcy risk. That can dramatically damage the valuation given to a company via its income. In that specific case, adding a ton of cash to relieve the bankruptcy risk, can produce a greater than 1x release in value as shareholders shift back to operating fundamentals & future expectations. Valeant Pharmaceuticals is a walking example of that right now. To the extent Valeant manages to lift the dark cloud of bankruptcy off of it, their market valuation will rise (every time they announce they've paid down some debt, or sell an asset for a good price, their stock tends to spike; they have something like $29b in long-term debt and the debt interest is threatening their existence; if they magically added $10 billion in cash tomorrow, their market cap would expand by something near a 1 to 1 basis or likely greater (depending on the bankruptcy pressure, relief from it can generate an amplified upside)). Another exception example: Las Vegas Sands (LVS), the casino giant, was under serious risk of bankruptcy during the economic crash in 2009; its founder, Sheldon Adelson, decided to back the company with a large amount of money, the stock proceeded to increase by 5x to 6x in a matter of a few months afterward, due to the relief that bankruptcy was no longer nearly so likely (shareholders shifted back to valuing the company on its future earnings/growth/operating expectations). LVS gained so much so quickly, because the risk of bankruptcy was viewed as being so severe it had drastically depressed the market cap of the company.

Certainly if there were two identical companies, and one had $10B more in cash, the one with $10B more in cash would be worth more than the other company? I understand it's not 1-1.

I'm thinking completely theoretically, so if the world doesn't work like finance theory, fine. But I just can't see any way in which leverage, debt, cash, etc don't substantially alter the market cap of a company.

> Certainly if there were two identical companies, and one had $10B more in cash, the one with $10B more in cash would be worth more than the other company?

Not necessarily. If shareholders believe the company with the less cash has a better future, that is if future earnings/growth expectations are higher for the company with less cash, then said company may be granted a dramatically higher market cap.

Two companies with identical balance sheets, identical growth rates, and identical net income numbers, can have radically different market caps. It depends on how shareholders regard the companies, what they think their futures look like (and sometimes it even depends just on more ridiculous things like hype / herd insanity, as eg with the dotcom bubble, in which Cisco was given an extraordinary multiple off its earnings).

Walmart's balance sheet & profit picture were far superior to Amazon's at the time when Amazon became larger than Walmart in terms of market cap. Shareholders came to believe that Amazon had a far brighter future, in regards to growth etc etc. Amazon has been granted an unusual valuation for a very long time, on the basis of expectations of future growth.

adventured is having a really hard time with your phrase "two identical companies". The answer to your question is yes, if you had two identical companies and then gave one of them $10B in cash, that company would be worth $10B more.

Actually adventured is right on non-operating cash being usually discounted. In general the second company will not be valued at $10bn more than the first.

Would you rather have a $1 in cash and a $9 share in the first company, or a $10 share in the second company where $1 is the cash per share? The second case is more risky so you wouldn't pay the full extra $1 for the second share.

Of course it could also be the case that the spread is larger than $1, if the first company is too short on cash and there is a liquidity risk depressing the valuation.

> The second case is more risky

Not if they're otherwise identical companies, it isn't. There may be reasons to expect a correlation between risk and cash holdings, or something to that effect, but ultimately a share in a company is a share of ownership of that company's assets. If a company didn't become $10B more valuable when given $10B in cash, where exactly did that value disappear to? Value doesn't vanish into thin air simply because it's now owned by a company.

Your loss is limited to $9 in the first case, but you can lose $10 in the second case. If you think this is not more risky, fine.

Issuing stock does precisely nothing to the valuation.

IE, imagine if they double the amount of stock.

Each stock is now half of the equity that is was before, so price would be cut in half.

Issuing (and selling) shares DOES change the valuation. The price is not cut in half because the company is worth now more than before (it has lots of cash).

> Tesla is worth more than GM for one reason: the potential to one day be more profitable than GM, namely that enough shareholders are buying into that premise.

Elon musk created a narrative that is building a completely different way of manufacturing and commercializing cars that differs greatly from historical car manufactures.

If you accept that, current economic models that are used to value other car manufactures can't be used to value Tesla.

That's the same thing they said about web companies in the mid 90s.

That's right. Tesla aims to be the Google of that story.

The web companies that survived turned a lot of industries on their heads, and are still doing it. What did advertising look like before Google and Facebook?

Of course, that doesn't tell you anything long-long-term. Every ad and product used to have AOL keywords somewhere. Tesla may obliterate the auto industry, but what forms from the ruins may not have a place for them.

Thanks for this outline.

What is a go-to place for finding data for such analysis? I would like to learn this :)

Google Finance is actually a pretty excellent resource.

Probably GM's 10k statement.

Except that the MARKET values GM's stock at...exactly what it is priced.

I'm not an expert on this but I think the point was market cap is the value of all outstanding shares. Tesla raised money through venture capital while GM raised money by going to the bank and getting a loan.

Think about buying a $1M rental property. One guy gets 9 friends together and they each put up $100k for 10% of the house. The house/business is worth $1m. The market cap is $1m.

Another guy wants to buy a $1m rental property but he goes to the bank and gets a $900k mortgage. The house is worth $1m but the market cap is only $100k.

Since tesla and GM raised money very differently their market caps are not comparable.

The house's market value is the same as its market cap. It would still be $1m in both cases. How it was raised is irrelevant; you won't find a buyer for less or more than $1m if that is its market price.

GM and Tesla are both public market stocks. Regardless of how they raised previous capital, the market is valuing Tesla higher.

"The house's market value is the same as its market cap."

That's because houses are quoted in total, not just the equity piece. Stocks are only the equity. (They could quote just the equity piece of houses. In that case it would be unhelpful to compare prices without checking the debt.)

Now that makes sense. The article is mostly generic new-economy blathering.

We'll know in a few months if Tesla will be a success. For their Model 3, Tesla has to transition from being a high-margin low-volume manufacturer to a low-margin high-volume manufacturer. That's very tough. Few companies succeed at that.

Already, the price of the Model 3 has crept up. The base vehicle is supposed to sell for $35K, but in practice most models will be around $45K with upgrades. Maybe higher. Overpriced upgrades are where the profit comes from in automotive. That may be how Tesla escapes fighting it out on cost with Chevy and Toyota.

I've found this article to be the most helpful for understanding how net debt and equity come together to comprise EV: https://www.wallstreetprep.com/blog/common-topics-of-confusi...