It's Time to Buy Tesla Motors

Historically, auto companies have been terrible investments. GM (NYSE: GM  ) and Chrysler recently went through bankruptcy and Ford (NYSE: F  ) survived but is trading at about the same price as 20 years ago. Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) have fared better, but over the last decade even they haven't performed particularly well on the stock market.

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Tesla Motors (Nasdaq: TSLA  ) is trying to break that trend as a new type of automaker, both from a technology standpoint and without the legacy costs that tied down older manufacturers. But there are a lot of outstanding questions for the auto manufacturer that is still bleeding red ink and won't turn a profit until at least next year. Important questions that come to mind are: Can Tesla make enough money to live up to the hype? Will EVs become popular? And most important for investors: Will the stock go up?

I'll attempt to answer these questions and make a call on whether Tesla will outperform or underperform the market below.

Can Tesla live up to the hype?
How do we value a company that's years from living up to its potential? For starters, I like to be able to envision a 10 P/E somewhere in the future as a baseline. With that as a target, that means Tesla would have to generate $300 million in earnings to justify its $3 billion market cap. How could it do that?

In the last quarter, Tesla generated a 28% gross margin on automotive sales, which should give us a ballpark start of a sensitivity analysis. If we assume that operating expenses will average $400 million per year, slightly more than their current rate, it means that Tesla needs $700 million in gross profit annually (I'm ignoring taxes and financing costs for simplification). I've provided three gross margin scenarios and three revenue scenarios below around possible outcomes.

Sales

20% Gross Margin

25% Gross Margin

30% Gross Margin

$2 billion $400 million profit $500 million profit $600 million profit
$2.8 billion $560 million profit $700 million profit $840 million profit
$3.6 billion $720 million profit $900 million profit $1.08 billion profit

To put these numbers in perspective, to generate $2 billion in sales Tesla would have to sell 20,000 vehicles for $100,000 or 40,000 vehicles for $50,000. Is that possible in the near future?

Tesla plans to deliver 5,000 Model S vehicles this year and the more expensive Signature version has been a big hit. Model X will come out next year and has already garnered 1,000 reservations. Then there's the new Roadster, due sometime around 2014 at a much lower price than the $100,000-plus price tag of the first Roadster. That's not even including a contract Tesla signed to supply power trains for Toyota's RAV4 EV and other supply agreements.

Based on these three vehicles, I think $2 billion in revenue is more than achievable in the next few years and could approach much higher levels given enough time.

Will EVs be a hit?
One of the bigger questions facing automakers is what customers will demand in the future. Range anxiety has been a huge problem with EVs and while hybrids have sold well, moving to a plug-in vehicle is a whole new ball game. This could be Telsa's biggest limiting factor.

What I've seen is that the high end of the market has done very well. Tesla and Fisker have sold very well, partly because they're attractive vehicles and partly because their clientele can afford the cost of a charger and a secondary vehicle (which is likely necessary at this point).

There's also the expanding and improving infrastructure to consider. Today it takes many hours to charge an electric vehicle, but charging stations are going up that will charge a vehicle in a half hour. Tesla's high-power charging system will add 56 miles of range per hour.

Can Tesla's stock rise?
Based on the analysis above and the trajectory of sales at Tesla, I think the company can sell more than enough vehicles to justify a higher price. Tesla is already planning to produce 20,000 Model S vehicles annually and has said that the new Roadster will be a higher-volume vehicle.

If investors are going to jump into Tesla's stock, it is a leap of faith just like any company where you have to project sales years out into the future. But Tesla has proven the ability to exceed expectations, such as by delivering the Model S earlier than anticipated. In the auto industry, that's almost unheard of.

I'm backing up this bullish call with an outperform call on my CAPS page.

Fool contributor Travis Hoium does not own a Tesla vehicle or any stocks mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Tesla Motors and Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor, Tesla Motors, and General Motors. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (19) | Recommend This Article (17)

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  • Report this Comment On June 08, 2012, at 1:52 PM, HKGuns wrote:

    Wow! The only word I can muster is Wow! I don't even know where to start with this absurdity.

    "Tesla Motors is trying to break that trend as a new type of automaker, both from a technology standpoint and without the legacy costs that tied down older manufacturers."

    -Oh really? How is that? You smugly act as if these "legacy" costs are a dirty word. Those legacy costs are American family pensions for which the recipients worked extremely hard to earn. I suppose it is just the new sex that appeals to the "so called" Wall Street investors.

    "To put these numbers in perspective, to generate $2 billion in sales Tesla would have to sell 20,000 vehicles for $100,000 or 40,000 vehicles for $50,000. Is that possible in the near future?"

    -Tesla is a niche player, your own numbers answer the question and alarm bells should be going off in everyone's head.

    "Tesla plans to deliver 5,000 Model S vehicles this year and the more expensive Signature version has been a big hit. Model X will come out next year and has already garnered 1,000 reservations."

    -This doesn't even add up to 10,000 units yet you still consider this a buy when a better argument could be made that it is over priced already. What is Tesla's total production capacity? Really? You completely ignore Taxes and financing costs? In the real world those numbers matter.

    "Can Tesla live up to the hype?" -No, they haven't and will not.

    Will EVs be a hit? -Not when you look at the number currently being sold by full line MFG's.

    Yes, by all means. Invest your dollars in the next Solyndra. That certainly worked out well didn't it? Invest your dollars in a company that has yet to turn a profit and ignore full line manufacturers who, even when burdened with "legacy costs", figure out a way to make Billions per quarter, pay dividends and provide tremendous levels of support to their communities.

  • Report this Comment On June 08, 2012, at 2:16 PM, friggingenius wrote:

    so let me get this straight.

    "It's Time to Buy Tesla Motors"

    because

    "Tesla Motors"

    "Can"

    "justify its $3 billion market cap"

    "in the next few years"

    Thanks - i n a few years, i might get my money back - foolish indeed. Seriously though, when did this site turn to utter garbage?

  • Report this Comment On June 08, 2012, at 2:21 PM, spawn44 wrote:

    1) Electric vehicles are being pushed to save the earth. Not because people want them. Does the earth really need saving. The evidence is showing and the political tide is turning that the whole AGW/IPCC CO2 thing was a complete fraud and scam. 2) If you have $50,000 to spend on a vehicle you will use only to commute short distances then this is the car for you. These cars are not practical to drive out on the highway on long trips.

  • Report this Comment On June 08, 2012, at 3:46 PM, SMOKEN42 wrote:

    WITH ALL DUE RESPECT, IT APPEARS MR. HOIUM COULDN'T HIT WATER IF HE JUMPED OUT-OF-A-BOAT !!!!!!!!!!!!!!!!!!!!!!!! THERE ARE MORE ERRORS IN THIS ARTICLE THAN AT A LITTLE-LEAGUE-BASEBALL-GAME.......................

  • Report this Comment On June 08, 2012, at 4:18 PM, mikecart1 wrote:

    Tesla is a great company, even inspiring. However, in this market, under this political reign, under the influence of automakers, Tesla as a stock is still speculative. Now it can go up more because this stock market is not logical. However, using Tesla's current products and prices, I don't see it making the type of profits said in this article.

    Basically I see with my eyes not with my ears or dreams. I have yet to see a single Tesla on the road. And no I don't live in the boondocks. I routinely see weekly pimped out Hummers, Nissan Skylines, Lambos, and Ferraris. Mercedes and BMW's are seen everyday. Vipers are seen monthly. I don't live in a celebrity town either. But you gotta wonder, if people are dropping $100000-200000+ on some of these sick cars and I have still not seen a single Tesla, then....maybe Tesla is not much better than a Terrafugia - the world's first legalized flying car selling for a little under $250,000.

  • Report this Comment On June 08, 2012, at 4:57 PM, devriet wrote:

    Well here's a first! I agrees totally with all posts and disagree totally with the article.

    One can only wonder how much much the author is being paid to pump this stock. Facts and math are not important.

    Tesla has delivered 1 unit...to an investor. No one has reviewed this model. Scary! What changes were needed so Tesla S model could pass the crash test?

    People....even Tree Hugger's are not buying the GM Volt. Gm at least has a proven track record.

    What does Tesla besides Hype?

  • Report this Comment On June 08, 2012, at 5:41 PM, maiday2000 wrote:

    mikecart1, I get your point, I have only seen two Tesla's on the road driving, and I actually drive by their showroom in Menlo Park quite frequently and live just down the road from Google.

    I don't even think anyone here in the Silicon Valley, aside from the utopian-believing dreamer with no sense at all, believes in their business model. They can't easily scale up, the metals that they need to make their batteries are expensive and not going to decrease in cost, and the average person isn't going to spend even $50K on a car whose reliability is a question mark and can't even be relied upon as a primary vehicle.

    How many Tesla's do rich people need? There aren't enough rich people out there who want one to keep buying them in the next 10 years.

  • Report this Comment On June 08, 2012, at 6:35 PM, ThorsteinVeblen wrote:

    @maiday2000, you say "There aren't enough rich people out there ..", but do the math. There are 310 mil americans alone. 1% is 3.1 mil. Heck, go with .5% and drop it to 1.5 mil. Factor in the rest of the world and you're pushing 10 million prospects. With gas pushing $10/gallon in Europe, sales will likely be stronger there.

    Not a bad prospect base to move 40,000 cars/year.

    Don't like the 56 miles of range/charge hour though.

  • Report this Comment On June 08, 2012, at 6:40 PM, The1MAGE wrote:

    Wow, a lot of disagreement with this article. I don't think it's time to jump into Tesla as an investment, but it is a company to watch.

    I want one of these babies myself, and I ain't no tree hugging hippie, and know all the faulty bs in the global warming myth. (Well mostly myth.)

    Legacy costs is a big issue in the car company business. Sure we can get emotional, and mention that it involves people's pensions, but if you think this through, it is a danger for the company, and the people living on the pensions. The product is less competitive price wise, and if the company goes out of business, those pensions go away too.

    It's nice to care about people, but this puts those people in a dangerous, and dependent state.

    To the current price, and cost of these cars, it is taking the same roue as many technologies have. Sell to the rich first, and learn how to make it better, and cheaper.

    The first HDTV I saw was $35,000. CD, and then DVD players were only for the wealthy when they first came out. Same with riding on a plane.

    Yes similar situations don't guarantee their success, but they are following the right model.

    The issues they need to overcome is a more rapid fueling system, and more locations in which to be able to fuel up.

    But here is why I believe in this. It costs 2¢ a mile to drive the thing. While it being an SUV, my driving costs about 18¢ a mile. Even something getting 40 mpg is costing almost 9¢ a mile (our local price, many places are more.)

    This isn't like other alternatives that need to be subsidized to pretend it actually works, and hide the real cost.

  • Report this Comment On June 08, 2012, at 9:49 PM, interdependent wrote:

    I am a biased tree-hugger: to me, The Model S is a one of a kind, amazing sedan. A game-changer.

    Price (based on battery range and trim package)

    $57,400

    $67,400

    $77,400

    $91,400 Performance

    $95,400 Signature (limited edition)

    $105,400 Signature Performance (limited edition)

    20,000 Model S units sold annually at retail might not quite satisfy Wall Street's expectations. But add power-train work for Toyota (and others), plus the Model X, plus the next Roadster, all built in an enormous low-rent, high-tech facility, and now you have a viable profitable business model.

    Model X, a "comparably priced" SUV built on the Model S platform, should do well enough in spite of the Delorean wing-style doors. It would only need to sell half as many units as the Model S to put Tesla into positive territory, beating expectations.

    Range: the current Tesla offerings of 160 - 300 mile range seems like plenty, especially with fast chargers opening up this month all along the West Coast Electric Highway and around the country. Throw in new battery technologies coming to market within the next 3 - 5 years, more power, faster charging, and up to 3x more range at lower cost, the cars will only get cheaper to produce and more desirable to own.

    See CEO Elon Musk in action in "Revenge of the Electric Car". He's a character on the edge, but heck, the guy's other company just successfully launched the first commercial rocket that docked with the International Space Station?! That's crazy too. Until it's not.

    Now it's history.

    Personal Disclaimer: I drool for Tesla. This company is fulfilling an abiding passion of mine, based on 30 years of waiting, for advanced electric cars.

    In Seattle I see Tesla Roadsters every week, and every time I leave the house at least 3 - 4 Nissan LEAFs. They are everywhere. Now my wife drives a LEAF. But me, I'm cheap. I drive an all-electrified Geo Metro everyday which hasn't burned a drop of anything for years. It's not lithium, just the traditional 19th-century Thomas Edison battery technology. It doesn't go very far on a charge, only around 40 miles. And yet, I consistently average more than 30 Miles-Per-Dollar, on 0 Gallons, and that price will not go up this summer.

    Will Gasoline get cheaper or more expensive during the next decade?

    Electric motors are more reliable, efficient and green. Seattle City Light is 'almost' carbon neutral and getting greener nowadays, adding wind and solar like many places in the country. Check out pluginamerica.org for more info on why electric is now.

  • Report this Comment On June 08, 2012, at 9:52 PM, johnadams620 wrote:

    I think Tesla will find its footing,not only in europe, but especially in asia.PMI dosen't sell any product stateside,but they do quite well with the rest of the planet.Little Tesla needs a catalyst to find/create demand and I think that will come from over seas.

  • Report this Comment On June 09, 2012, at 12:07 AM, berylrb wrote:

    interesting how those with the least knowledge about Tesla or facts jumped on this thread first, and those with the most fact and knowledge came in last.

    The real issue is that Tesla is a startup, what's the foolish way to invest in a startup if at all?

  • Report this Comment On June 09, 2012, at 12:11 AM, 111Dave111 wrote:

    I'll bet youTesla $10,000 is bankrupt in 2 years.

  • Report this Comment On June 09, 2012, at 12:38 AM, berylrb wrote:

    you do know that the total 5,000 car 2012 production run is sold out, yes?

  • Report this Comment On June 09, 2012, at 2:13 AM, Crazylegs52 wrote:

    Well, the article certainly garnered a lot of passionate responses...

    I, for one, love the idea of all electric vehicles (as long as our outdated power grid can support it). I would like nothing better than to not buy a thing from Russia or the MIddle East other than vodka and persian rugs.

    The problem that I see, is Tesla is going up against some big (and newly rejuvenated) competition. The Model S and X as well as the niche roadster, have a headstart, and they will need it. With the price of gasoline slowly dropping, the auto market is already seeing a decline in the EV market. Look at the latest reviews of the Honda Fit EV. It is more expensive than the gas powered version and with equivalent usage, wont pay itself off for >10 years?

    Also, the diesel market in the US is heating up. Sales of high mileage diesels are increasing quickly with VW, Audi, and MB leading the way. Although the EV's can claim no emissions, the clean diesels are exactly that, very clean. They don't cost as much, LAST FOREVER, and still return 40-60mpg depending on the car.

    I think Tesla is interesting, and a boutique player. In the next 5-10 years we will see GM, Volvo, BMW, Audi, Ford, Lexus, etc all have either plug in hybrid, or plug in alone, high end cars.They will be supported by the dealer and service network. They will be easier to find, recognize, and service.

    Tesla will have a very uphill struggle once this starts.

    I think another 5 years before I would recommend a "buy" for Tesla.

  • Report this Comment On June 09, 2012, at 10:41 AM, Dojomouse wrote:

    111Dave111 - I'm tempted, but since I think I can easily beat 50% per annum by investing in Tesla I'll pass.

    Travis - good article. One major error. Tesla's DC fast charger ('SuperCharge) is going to be a 90kW system. This means it can recharge not 56 Miles of range per hour, but rather 300 Miles.

    56 miles/h is with the slower onboard charging system.

  • Report this Comment On June 11, 2012, at 12:25 AM, SuntanIronMan wrote:

    @HKGuns

    Great job with the phoney outrage. Amazing how you took 9 completely-innocent words about legacy costs (about how there aren't any, being basically a start-up company) and seemingly surmised that Mr. Hoium is a smug-jackass with questionable morals. Work of art, what you did there. Lol.

  • Report this Comment On June 14, 2012, at 5:27 PM, zontar100 wrote:

    Global warming myth? Hmmm...I suppose it is "foolish" to hide one's head in the sand. If you want to ignore the concurance of all those who monitor global temperature, glacial melts, ocean temps, past geology etc. go ahead, fool on!

  • Report this Comment On June 16, 2012, at 1:06 AM, wayoutie wrote:

    Years ago there used to be 500 feet of ice over Manhattan island and above the great lakes and north. The earth has been warming since long before man had even enough camp fires to warm his feet.

    The earth has only warmed up one and five eights degrees in over a century.

    Believe the rip off artists if you do not want facts.

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