The Elon Musk Effect
Business Acumen: Which is more important? Profit or people?
There are many successful CEOs of Fortune 500 companies, but do you know all their names? Take Tesla and Cisco. Both are two very successful companies with two very different strategies with surprising consequences.
The Real Value of a Company
We're going to talk today about why people are more influential than profits — and to know that this is the case, look no further than Elon Musk. Tesla as a company brings in about $53 billion in revenue or the top line. But if we look at their bottom line, they only bring in about $5 billion in profit. Compare that to a relatively stable, mature company like Cisco. Cisco, similar to Tesla, made $52 billion in revenue, but brought in double Tesla's profit with $10 billion. But how much is each company worth? To do that, let's look at their market cap. Market cap, by the way, is all the shares outstanding. For example, if a company has 4 billion shares out there and each of those shares are being traded for a dollar each, the market cap is $4 billion, right? So, the market cap shows the value of the company in the mind of the shareholders which is the real value of the company. The real value of the company is what people are willing to pay for the company.
Stock prices change every day, but as of today, Tesla's market cap is $828 billion — the 6th most valuable company in the world — again at $5 billion in profit. Compare that to Cisco which has the exact same revenue numbers as Tesla but is double the profits at $10 billion. Cisco's market cap is $181 billion and is the 45th most valuable company.
People Over Profits
Why can two different companies — both the same revenue, one with double the profit of the other company — be worth hundreds of billions of dollars more than the other company in the minds of shareholders?
And the reason for that is because of people. People are the ones that are investing. We love drama, we love excitement, we love intrigue, and we love inspiration. Elon Musk inspires people. Think about the world's most valuable company: Apple. Apple's market cap is $2.5 trillion. That is still — I'm going to propose to you — the legacy of Steve Jobs. We are still willing to pay phenomenally high prices for its stock because we believe in Apple's mission and the inspired vision of a leader who passed away many years ago. That is the power of people in business.
It sometimes gets frustrating to very logical, organized finance folks that the valuation of a company has anything to do with the visionary power of the leader. After all, Cisco is very financially stable and one to admire in many ways. And although the working of a company's financial statements is critical, the story of the people behind a company's success is just — if not more — important.
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