There’s no real precedent in the drug industry for the rapid rise of Moderna Inc. on the back of its highly effective Covid-19 vaccine. The company’s market value soared from $6 billion to a peak of almost $200 billion in 19 months, exceeding century-old Big Pharma stalwarts. Last month, it entered the S&P 500 Index.
It takes a leap to a completely different industry to find a good comparison. Elon Musk’s Tesla Inc spent much of the past 19 months on a similar run, rising from less than $100 billion to a peak of more than $800 billion, joining the S&P 500 along the way and leaving other automakers in the dust (it’s valued at about $700 billion today). Neither company’s valuation makes much sense by any sort of conventional analysis. But with Moderna now being touted as the “Tesla of biotech,” clearly there is no choice but to actually examine what could possibly unite a drug developer with a manufacturer of electric cars.
One way to think about Tesla’s valuation is as an expanding total addressable market, or TAM as it is known. TAMs are an especially big deal for startups and disruptors because, in the absence of significant profits, their sales pitch centers on growth. And the precondition of growth is a giant space into which you can expand. A consistent theme with Tesla over the years is the creation of such space to either establish room for a future rally or justify an earlier one (see this).
The necessity of this process increases as the valuation advances. Consider: Tesla aims to grow vehicle sales by 50% a year on average “over a multiyear horizon.” Assume it does and also achieves a consistent net margin of 10% on vehicles costing $50,000 apiece. By 2026, Tesla would sell almost one in two of all battery electric vehicles worldwide and have expanded its automotive revenue elevenfold. Even assuming all that, the current stock price would be 23 times those projected earnings five years out.
Sure, you could assume even faster growth in EV demand, even higher margins or both. But why not just expand your horizons and say that, apart from ruling in EVs, Tesla will also crack autonomous driving, operate fleets of robotaxis, transform power supply (profitably), run a multibillion-dollar insurance firm and maybe even launch an aviation side-hustle that, alone, might be worth somewhere between 14% and 140% of the current stock price? This is not to deny actual success; Tesla has clearly achieved a lot, and has given its faithful reasons to believe the growth trajectory will continue. The point is that once the narrative is established that your company is actually a “digital platform” with limitless product potential, then the sky is the limit. You may as well just hard-code the target price you want rather than go to the trouble of modeling anything.
How about Moderna? Its valuation also reflects expectations for big growth, in this case coming from two main drivers: continued sales of its Covid vaccine and future windfalls from new vaccines and treatments in development that use the same messenger RNA technology.
The Covid vaccine is a unique product to value. It will produce extraordinary profit in the next couple of years; Moderna is expected to generate $29 billion in adjusted Ebitda across 2021 and 2022 compared with Tesla’s $23 billion. But the ultimate scale and longevity of the opportunity are unclear, depending on whether booster shots prove popular, vaccines tailored to variant strains are needed or if competitors falter. Optimism on all fronts is baked into the price and then some. Analysts’ estimates, however, imply sales (and earnings) will decline sharply after next year.
As with Tesla, much of Moderna’s multiple rests on theoretical future products; so theoretical, it seems, that even the sell side hasn’t put numbers around many of them.