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In the following analysis, we take a look at why Tesla could be an attractive acquisition target for Google.
Tesla’s need:Google’s software muscle and large cash pile increase Tesla’s chances of executing well in a larger space. We outline a case with Google as a Tesla parent, that could see Tesla grow 10x from its current market cap of close to $150 billion to $1.5 trillion by scaling its production and deliveries to about 8 million units, approaching VW & Toyota, while monetizing its self-driving technology more broadly by licensing it to other auto-makers. Considering that Tesla stock has soared past $900 from $500 levels in less than ten days, and all of this after an already surprising rise from the lows of below $200 less than a year ago, we believe the outliers are not so difficult to imagine.In this analysis, we remind investors of risks in the stock, as-well-as provide additional color to the upside case, tying our two outliers analysis together. (Tesla Stock Upside: $2,000? and Tesla Stock Downside: $0?)
Google’s need: Google needs to grow revenues, and cars are a huge market, with roughly 90 million sold per year. Moreover, selling self-driving cars and software are right up Google’s alley, and Tesla is a leader by far in this space.Google has the financial muscle to undertake an acquisition of this size, given its $1 trillion market cap, ~$120 billion in cash reserves and free cash flows of over $20 billion a year.If Google paid a 50% premium over Tesla’s current market cap of close to $150 billion, this would value Tesla at $225 billion. While this is a large sum to pay for a company that has yet to turn an annual profit, the upside may be substantial, as we detail below.
Fit:Both companies are betting big on machine learning and AI The culture of Google’s Other bets division will fit well with Tesla.
Tesla could potentially be worth $1.5 trillion to Google
#4.1 Tesla's Net Profit Margins could be higher than rivals such as BMW, as it increases its mix of software revenuesTesla's higher mix of high-margin software sales could help its overall net margins despite the negative impact of a growing proportion of mass-market cars in its marginsMoreover, Tesla's direct sales model (which bypasses traditional auto dealerships) should also help its margins. For perspective, Automotive retailers typically have net
margins of over 3.5%.
Tesla Net Profit Margins
BMW Net Profit Margin
Google Net Income Margin