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