Skip to comments.Is Tesla Motors Really Worth $100 a Share?
Posted on 06/22/2013 1:33:56 PM PDT by SeekAndFind
Can Tesla Motors really make it in the automotive mass market?
It's the question that haunts (or that should be haunting) current and potential Tesla investors. Tesla has already achieved big things, designing and building a great electric luxury sedan in the Model S, pictured above. It has also proven that it can sell enough of them to turn a profit.
It's true that so far the profit has been tiny, and the economic conditions in the U.S. quite favorable, but still: That's an enormous achievement.
But it's another big leap from there to becoming a mass-market carmaker - but it's a leap Tesla will have to make to justify anything like its current stock market valuation.
Can Tesla do it?
A closer look at Tesla's real mass-market plan Tesla has never made a secret of the fact that its ambition has been to enter the mass market all along. CEO Elon Musk reiterated that plan in an interview with Bloomberg last week.
In that interview, Musk said that Tesla was working toward a vehicle that would be "half the price" of the Model S, would have a range of about 200 miles, and would come to market in "3 to 4" years.
The Model S starts at $69,900, not counting a $7,500 federal tax credit, and can be optioned up to a bit over $100,000. So at half of that price we're still talking something that's priced more like a BMW 3-Series than a truly mass-market compact car.
Tesla has already proven that it has a knack for upscale styling and for the details that matter to luxury-sport-sedan buyers. It's not a big mental leap to imagine a baby Tesla that delivers Model-S-like performance and luxury in a 3-Series-sized package, with a 200-mile range and a starting price around $35,000-$40,000.
It's also easy to imagine that Tesla, which will see its street cred burnished by more glowing reviews as it rolls the Model S out in Europe and Asia later over the next year or so, will be in a good position to sell a fair number of those compact sedans.
Buyers will continue to worry about the lack of recharging stations, but 200 miles' worth of range is enough for just about anyone to get to work and back home with plenty of extra electrons in the tank.
Long story short, it could do well for them. Or maybe we should say well enough? But how well?
The two big questions facing Tesla's hopes for mass-market volume There are two big questions here, and we don't have easy answers to them yet. But the answers that suggest themselves should be troubling to Tesla investors.
First, will Tesla need to build more factories? It's a big question because car factories are expensive investments, both up-front and on an ongoing basis.
An all-new factory with all the relevant tooling for an assembly line or two could cost a billion dollars. That's just the beginning, because every factory adds to ongoing fixed costs, costs that Tesla - with just one factory so far, and that acquired on the cheap - has been able to contain so far.
The greater Tesla's fixed costs, the more cars it has to sell just to break even, no matter what the economy is doing. So far, the relatively strong U.S. economy has been very favorable for the Model S, but that won't last forever - and as Tesla expands globally, it becomes vulnerable to economic headwinds elsewhere, just like any other major automaker.
Fortunately for Tesla, its current factory is a big one, built originally for a joint venture between Toyota and General Motors . During the days of that joint venture, the factory was said to have an annual capacity of around half a million vehicles. Tesla should be able to ramp up to somewhere in that neighborhood without adding a facility.
That's a lot of Teslas. But even maxing out its current factory may be a challenge for the company.
Tesla is surrounded by huge potential competitors The second question is one that some observers have been asking all along: What happens to Tesla's market if and when competitors enter it? Right now, Tesla doesn't have any direct competitors, but that's not because the major automakers can't compete with Tesla.
Instead, it's because the mass-market automakers have largely stepped away from full-scale battery-electric-car development in the last couple of years, preferring to focus on more promising advanced technologies like fuel cells, while using (and adding to) their battery-electric expertise by building plug-in hybrids and small EVs for limited markets.
The problem, from their perspective, is that battery technology hasn't advanced as quickly as many analysts were predicting just three or four years ago. Lithium-ion electric-car batteries are heavy, and expensive, and you need a lot of them to get good range, and recharging stations are few and far between.
Tesla "solved" those problems with the Model S by designing a big car with enough luxury features to justify a high price, and by announcing plans for a network of recharging stations. It's a good solution and the Model S has found a nice market - but make no mistake, it's still a tiny niche market by global auto-industry standards.
But if there turns out to be a larger global market, it wouldn't be very difficult for any of the mass-market automakers to build something similar to the Model S - and to leverage their much greater economies of scale to put heavy price pressure on Tesla. (Sure, Tesla has some patents that might need to be licensed or worked around. But Tesla didn't invent EVs, and several of the big automakers have EV patent portfolios of their own going back a decade or more.)
What happens then?
So how is Tesla worth $100 a share? I don't think that the hard answers to either of these questions mean that Tesla is doomed. But I do think they call into serious question the extreme sales and profit growth assumptions that are now baked into Tesla's stock at $100 a share.
At current prices, Tesla's market cap is almost $12 billion. That's about a fifth of BMW's, and BMW sold 1,845,186 vehicles last year. Tesla expects to sell 21,000 in 2013, and BMW will probably sell around 2 million.
If we assume BMW's fat margins and BMW's brand strength and BMW's consistent top-notch execution can all be approximated by Tesla, and we discount a bit (because BMW also has a motorcycle business that we're not taking into account) we can say that Tesla has to pretty much max out its factory - or make about 500,000 vehicles a year - to be worth $100 a share at BMW's multiple.
Clearly, it's not close now. But can it get close?
Tesla recently told analysts that it expects to be making around 500,000 vehicles a year eventually, but there are reasons to be skeptical about its ability to get there.
Start with this one: Counting all of its variations (wagons, coupes, sedans, convertibles, et cetera), BMW sold 406,752 3-Series around the world in 2012. Given BMW's global brand cachet and the (well-deserved) excellent reputation of the 3-Series in particular, that's probably the extreme upper limit of global annual sales for the future baby Tesla we discussed above.
The realistic number of sales that Tesla could achieve in any given year is probably a lot smaller. That means that even when we add in Model S and Model X sales, and sales from a future next-generation Roadster, Tesla's going to have to execute to perfection and dodge competitors just to get close to that 500,000 number.
Given what we know today - and granted, things could change - it's very hard to see how it could increase sales much beyond that.
Second, GM is about to roll out a new electric car of its own, the Chevy Spark EV. It's a little tiny car with just 82 miles of range, but it's priced right: $19,995 after that federal tax credit, or you can lease it for $199 a month. It's not a Tesla, but it's said to be a hoot to drive as cheap small cars go, with a zero to 60 time under eight seconds.
GM probably won't sell very many, but think long and hard about what GM - which has been playing with electric cars off and on for about 20 years now, since the first EV1 - could do if there turned out to be a serious market for a battery-electric compact luxury sedan at $45,000 or thereabouts.
Or for that matter, what BMW or Volkswagen, or Ford, or Honda could do. Remember that this mass-market Tesla is still three to four years away, according to Musk, so there's some time to work on this.
If you add up all of the above, and you can still explain to me - with facts, and realistic assumptions - why Tesla's stock is worth $100 a share right now, then you absolutely should. Scroll down to leave a comment and share your thoughts.
Tesla's plan to disrupt the global auto business has yielded spectacular results - so far. But giant competitors are already moving to disrupt Tesla. Will the company be able to fend them off?
Model S is Car and Drivers 2013 Car of the Year.
I want one.
I can’t speak of the stock’s price but I know one thing..the Tesla vehicle I looked at,sat in,and discussed with a salesman (they have a “store” at a mall that I frequent) isn’t worth half of the $80K sticker price that I was quoted.
RE: isnt worth half of the $80K sticker price that I was quoted.
Don’t you get a rebate from Uncle Sam?
The profit in the Tesla S is from subsidies and carbon credits, iirc.
simple answer is NO
The thing about Tesla that is intriguing is where there is value in the company. It sounds like the innovation comes from the computer management of the battery power. The rest of their vehicle production uses a lot of very solid venders. It doesn’t mean they will succeed, but they are a far cry from a Chevy Volt or a Fiskar. (I don’t own any Tesla stock)
Until they can get a battery with almost no chance of exploding, or catching fire, after thousands of recharges, electric cars are going nowhere.
Also, cold weather performance is an issue. I don’t think that a 200 mile range is sufficient, because when its -40C out, that battery will likely be dead in 8 hours, even if you had charged it and didn’t go anywhere.
Yup, i would take either car you mentioned any day.
“I want one” meaning if i was filthy rich and wanted yet another toy after obtaining an Ariel Atom.
Tesla is done. Watch it drop from here.
The company is not profitable.
Right now, the big investors want the little guys to jump in on speculation so the big guys can get out.
Buy a government-financed car? I’d sooner walk.
Nice. I need one of those!
“It feels like my brains are being sucked out”. LOL
Tesla’s goal is not to be a mass maker of cars but to sell premium electric vehicles. Says so on page one of their website.
The secondary goal is to serve as a catalyst for the electrification of the automobile. In other words they want mass market auto makers to make compelling electric vehicles.
Tesla has plenty of brand cache and growing.
Tesla received $451M loan from DOE.
FR poster boy Ford received $5.9B in loans from DOE. As in Billions.
Tesla buys off the rack batteries. That is not the proprietary genius. It is in the management of those batteries. That is why MB and Toyota are buying Tesla drivetrains. If it was easy neither Toyota nor MB would buy Tesla drivetrains.
Then their is the 120 volt super charging stations which will mostly be solar powered. You can go from 20% charge to 80% charge in about 22 minutes. Where weather does not permit they will buy power from local utility. Free to buyers of Model S sedan with 85kwh battery $2k option for 60kwh battery Model S. That is the cost to fuel the Model S, forever.
85kwh car has max range of 420 miles if driven at constant 20 mph and minimum of 200 miles if driven like Jeff Gordon in that Pepsi commercial through Death Valley with AC at full crank. AC at full crank reduces mileage by about 16%, about same for gas powered car. Most people will get 250-265 miles in real world driving on full charge.
The 85kwh with free fuel forever is worth every bit of the $80K-$100K price tag when you compare and contrast to MB S Class BMW 7 Series and Audi A8. That is the real competition right now.
Lastly OPEC and Russia HATE TESLA.
Tesla Model S has virtually zero maintenance.
Rotate tires and change oil in torque converter every 12 years. Change interior air cabin filter every two years.
Electric updates/recalls come through wifi.
Tesla Motors has NO LEGACY COST.
No million of old UAW retirees and their health care benefits.
Is Barack Hussein Obama the One?
Then you have to buy off the EPA in order to be able to dispose of them when the time comes.
battery cars are a fantasy. interposing a third agent between the power plant and the drive train is mechanically inefficient. If you have to have an electric motor, you need on-board power generation, ala LeTorneau, but the question of purpose is still unanswered.
The main goal of battery-electric car seems to be the centralization of motive power. In other words, it's communism on wheels.
The obvious answer is yes, at least to some because the equity trades around that price.
The car sounds like a very desirable car to own considering how that price suits you. It is meaningless when Motor Trend and to a lesser extent Car and Driver tout the car. However, I pay closer attention when Consumer Reports gives the Tesla a near perfect score.
I agree with you. That’s exactly what electric batteries are all about, ensuring people don’t have the ability to really go,anywhere.
The Ariel Atom is even FASTER now.
There are updated vids on youtube.
They are not that SUPER expensive, i just wish i had a spare 30+ grand to spend....
The US spec Ariel Atom is built about 45 minutes away from me. They’re right by VIR, an excellent road race track that snakes in and out of the VA/NC border, near Danville.
You can rent one and take it out on VIR, by the way.
The battery is kept within a certain temp range when the car is plugged in, and when the car is being driven. It is either heated or cooled, as necessary. Enough heat is generated by the motor and electric components to keep the battery coolant warm on a cold day.
This is true for most electric cars, with the Nissan Leaf being one exception. Which is why the Leaf has serious range variations. It has no temperature control system for it’s battery pack, except for a small fan.
Thus the recommendation to keep the cars plugged in whenever possible to allow certain systems to remain powered and functional without draining the battery pack.
This also allows the car’s interior to be warmed up or cooled down before you get in.
You still have range affects from temperature variations, but they aren’t nearly as bad as you’d think on the better engineered cars. Unless you leave them unplugged in the winter overnight...
Absolutely. From the Daily Beast, of all places:
"State and federal regulations provide manufacturers with lucrative tax credits when they manufacture and sell zero-emission vehicles. And rather than build green cars themselves to meet mandates, some manufacturers simply purchase credits from companies that make zero-emission vehicleslike Tesla. In the first quarter, Tesla said sales of such credits amounted to $68 million, or 12 percent of revenue."
Tesla's "profit" for the same period was $11 million. In other words, without its bogus carbon sales revenue the company would have posted a $56 million loss.
Thank you for the link, I have a friend that will definitely be very interested in that.
I’ve thought of doing it myself. For people from away, there are trackside villas available for rent also. Drive right out onto the track in the morning, assuming there’s no event going on that day. They do have some major 24 hour races from time to time. I’d probably like the historical vehicle races and rallies more myself. I see the cars on trailers headed there past here spne weekends.
That sounds really great.
We don’t have anything like that here in MA.
Back in the 60’s and 70’s there were a lot of local speedways around here but not anymore.
the lawyers and insurance companies saw to that.