Question

GM, Ford, and Tesla are automobile companies. Or are they? Explain how valuing Tesla and Ford may differ from valuing GM? Which stock is the most expensive? How did you determine which company was the most expensive? Do you think intangible assets are a larger share of total company assets today than 3-4 decades ago? How has this change made the valuation of business more difficult or easier? How could or would you measure intangible assets of a publicly listed firm? What type of companies have a large share of their assets tied up in intangibles (e.g. manufacturing, retailers, etc.). Explain why this is likely the case.

Answer 1

TESLA VS FORD VS GM

The debate between a conventional automobile company (that builds combustion engines) like Ford VS Tesla (electric cars) was more in favour of Tesla as the world moves to more sustainable and cost-effective transport.

Since 2013/16 both GM and Ford have been losing out to Tesla for a several reasons, not just marketing.

See graph below: (source Business Insider)

Both Ford and GM have been around for more than a 100 Years. But the new kid on the block, Tesla has been around since 2003

	Ford	GM	Tesla
Year Founded	1903	1908	2003
Market Cap (approx.)	34 Bn	50Bn	40 Bn

Here where it gets interesting (2018) and let’s look at the growth and operation leverage of Ford and GM that will allow it to compete with Tesla:

	Ford			GM		Tesla
Cash on Hand	38 Bn``			24Bn`		5Bn
LT Debt	103Bn			73.4Bn		11.2Bn
Total Liabilities	226Bn			186.6Bn		25.3Bn
Revenue		2013	2016		2018			2008
Ford		145	152bN		160bN			140Bn
G<		142Bn	149Bn		140Bn			140Bn
Tesla		2Bn	7Bn`		21Bn

Revenue of Tesla has been growing exponentially compared to Ford or GM

Tesla Delivery Numbers

2018	2016	2017	2018	2019
50,658	76287	103181	245,162	350,000 estm

Adverting:

	Ford	GM	Tesla
Adv 2016	4.3Bn	5.3Bn	0
Adv 2017	4.1Bn	4.3Bn	0

Looking at Social Media Advertising FOLLOWERS

	Ford Co.	Ford CEO	GM Co	GM CEO	Tesla Co	Elon Musk
	1.2M	0	698K	47K	4.1mm	28MM
Total	1.2mm		750 K		32MM

Tesla can run ads on Social Media without paying a dollar and its share of mind in marketing is 32000% more than Ford! But Ford and GM pay out 4Bn per annum, without investing in RnD or making new products!

Dividends is interesting as well

	Ford	GM	Tesla
Dividend %	6.84%	4.22%	0
Pay-out Ration	110% (approx. 4Bn)	23.9%` (approx. 1.9Bn)	0
Net Income 2018	3.7Bn	7.9Bn	1 Bn

This means that Ford pay out more than 100% of their earning to shareholders and its share holders are happy to receive that and keep the stock afloat!! But Ford stock has lost half its value since 2015 (16$) to 2019 (9$).

Ford has a tough choice:

1. Keep pay-out dividend to keep investor happy, or,
2. Cut dividend and the stock may crash

Now for Ford and GM the question is

3. Do they invest massively in EVs and take the fight to Tesla? This will mean cutting down dividends and investing in new projects?
4. keep the status quo, which would mean losing market share to new innovators like Tesla

Tesla has invested heavily in Shanghai, China for an assembly plant that has scale that neither Ford nor GM can catch up with/

Tesla is miles ahead in innovation. It is a software and robotics company wrapped around an automobile, Ford and GM on the other hand are trying to reinvent the car or really, reinvent the wheel, which is too little, too late.

	Ford	GM	Tesla
High Volume SUVs in USA	Escape & Explorer	Chevy: Equinox	Model Y
High Volume Pickups in USA	Ford 150 (Rivian?)	Silverado	?

Summary:

1. Ford and GM pay approximately US$4Bn. In advertising, without investing in RnD or making new products! Share of Mind of Tesla products is massive compared to Ford or GM. Any new product in Tesla’s the pipeline is sold before it hits the showroom
2. Ford and GM are paying Billions $ in dividends and barely keeping any of its profits. How can Ford and GM keep up with Tesla’s RnD spend? If they reduce their dividends, expect the value of both to drop substantially.
3. Ford and GM corporate structure are set up for saving careers of their employees, not set up for radical innovation or rewarding trial and error.
4. Tesla will out compete Ford and GM because they have miles of head start inn production facilities in China and other countries
5. For the above reasons, Tesla is more valued than Ford or GM because of their Intellectual Property. Monetisation of their IP (intangible assets) is far higher than Ford or Tesla as production rams up and generate economies of scale.
6. Ford and GM are more expensive than Tesla today.

A: Intangible Assets may include patents (IP) , trademarks, and even goodwill.

B: Patents and trademarks are valued differently depending on whether that are generated internally or acquired. Cost to develop a patent (IP) will be expensed during that period of development even though the intangible asset may have life of several accounting periods. Thus, an intangible assets may not show up on the Balance sheet of a firm.

Good will can be consequent to an acquisition. First the firm that acquires the target will price the tangible asset, anything paid over and above that will be allocated to intangible asset or goodwill.

C: Many Manufactures or retailers have the Intangibles tied up in distribution as they may have taken decades to develop barriers to entry. A new entrant despite cash will want to buy this intangible asset of channels over the book value of the distribution channels or chain.

Further. Manufactures and retailer develop Trademarks that they will want to defend, Longer the trademark is in the market, the more premium it will command. An example would be if Coke or Pepsi want to enter India, the most recognisable Brand was Thumbs Up. Coke had to buy the trademark/brand to establish their own.