In 1903, Henry Ford built the Ford Motor Company to create and sell mass-market automobiles. During the company’s 113-year history, Ford became one of the largest automakers in America, selling millions of cars a year and weathering several financial crises. Today, they’re the second-largest car manufacturer in the country (bested only by General Motors), and the fifth-largest in the world.
In 2003, several entrepreneurs (including Elon Musk) founded Tesla Motors, now Tesla Inc. The company quickly became the most popular electric car manufacturer and the makers of the best-selling Model S.
As of today, Tesla ($TSLA) is worth more on the stock market than Ford ($F). Ford is a profitable company, sells millions of cars a year, and has existed for over a century. Tesla isn’t profitable, sold less than 80,000 vehicles last year, and is less than 15 years old. How can a young company making less money and fewer vehicles be worth more than the American mainstay that is Ford?
Because investors think they’re worth more.
Tesla has a higher market capitalization (or market cap) than Ford.
A company’s market cap is determined by the number of outstanding shares available for trading (owned by investors, investment firms, and company employees) multiplied by the current share price. This comes out to how much the total outstanding shares are worth. When we say Tesla has a higher market cap than Ford, that means that the total value of all existing Tesla shares is higher than those of Ford.
Ford currently has 3.9 billion outstanding shares. Their stock price as of this writing is $11.34. This would make their market cap $44.265 billion.
Tesla, on the other hand, has 162.9 million outstanding shares (though they’ll have more soon). Their current stock price is $293.98. This would make their market cap $47.94 billion, or more than a few billion dollars than Ford.
A company can have an enormous market cap and still not be profitable.
Investor demand and the number of outstanding shares (the supply) more or less determines how a stock is priced. If investors think Tesla is a good buy, they’ll demand more of it and drive the stock price up. Conversely, if investors feel Ford is losing value, they will demand less of it and the company’s stock price will fall.
Tesla might not sell millions of cars and make billions in profit, but investors feel the company will be doing that in the near future. When the company announced that they made and sold more cars than experts expected them to sell, investors took this as a sign that the company was on the path to profitability and success in the coming years. This caused Tesla’s stock to increase by over 5.5% in a single day, making their stock more valuable than Ford.
Ford, on the other hand, is just another automaker. The company is profitable, but their profits are getting smaller over time. The company makes electric and hybrid vehicles to compete with Tesla, GM, and others, but they’re not as hip and enticing as Tesla’s cars. As Tesla rose on the stock market in the last few years, Ford has declined, seeing a 13.47% decrease in the last year alone.
Should you invest in Tesla? Tesla won’t make a profit for a while, as they owe billions in debt. They also won’t manufacture millions of cars like Ford, though they certainly want to. Yet more people are buying their vehicles, and they have enough cash to keep making them.
If you are like many Tesla investors and think the company will be profitable and much more valuable in the future, do your research and consider investing in $TSLA. Just remember that the company’s revenue and profit needs to catch up with current expectations, or that $47.94 billion market cap could come crashing down before you know it.
(Speaking of Tesla, here’s how the company plans on raising money to make more cars in 2017.)