The Model S Isn't Worthy of a $20 Billion Valuation and That's OK


Model S. Source: Tesla Motors.

The Model S is not representative of Tesla Motors' (NASDAQ: TSLA  ) mission. It's a means to the goal.

"In general, our mission is to catalyze the entire EV market ..." a representative from Tesla said in an email. Obviously a vehicle that starts at $70,000 isn't going to do the trick. The company is going to need a mass-market vehicle to catalyze the entire electric vehicle industry. Fortunately, that car is three to four years out, according to CEO Elon Musk.

The Model S might boast some impressive accolades, but it's not the company's bread and butter.

The plan
Tesla doesn't trade at a $20 billion valuation simply because the Model S is an excellent car. The market is forward looking. And when it comes to Tesla, the valuation is all about the company's aspiration for a mass-market vehicle. The Model S is simply evidence that management can execute on its ambitions.



Fremont factory. Source: Tesla Motors.

If Tesla's Model S really did convince the Street to value it at more than $850,00 per car, it would have to be a supercar with the ability to hover over traffic.

Obviously this isn't the case. The valuation is indicative of the Street's confidence in Tesla's ability to bring an affordable vehicle to market in mass production. This, my friends, is Tesla's bread and butter.

Here's a quick recap of the first three steps in Tesla's secret master plan:

  1. Build sports car
  2. Use that money to build an affordable car
  3. Use that money to build an even more affordable car

The affordable car
What do we know about this "even more affordable car"? A few things.

CEO Elon Musk has recently asserted that the company can bring it to market in as early as three to four years. Musk has also said that the car will be a bit smaller than the Model S (which is a large sedan). It will carry a price tag around $35,000 and should have about a 200-mile battery range.

Realistic?
The Model S is simply an avenue of approach for Tesla to get to its affordable car. And, so far, it's looking good. Sales are soaring, infrastructure is expanding, and demand is growing.

With the opportunity already priced in, the question investors have to ask is this: To what degree is this opportunity already priced in? Then, they need to compare that answer with their expectations.

Unlike the doubters, I sincerely believe that the company is hedging its success and has an excellent chance of producing an affordable car in the hundreds of thousands.

What's your take?

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Read/Post Comments (6) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 04, 2013, at 3:17 PM, nokeyes2 wrote:

    Just the other day I saw a beautiful dark blue Model S driving around in Los Angeles with a hilarious license plate,it read "OIL LOL",that says it all.

  • Report this Comment On September 04, 2013, at 4:13 PM, jetamerica wrote:

    I cannot agree with Daniel's thesis. Everything with TSLA is on the come. Apple was a bread and butter product that had mass appeal. Even TSLA's "bread and butter" car is several years out. This car has sold successfully because of massive government financial assistance. Musk does a superb job in his businesses in getting the taxpayer to assist his enterprises with massive financial assistance. The concept of a luxury product that sells with such support is anathema.

    Ford may be worth $20 billion with its broad global product franchise and 6.5 million annual unit sales whereas TSLA selling 21000 units and the hope within 4 years to increase that to 300,000 does not.

    I suggest shorting TSLA at any price above $140.

  • Report this Comment On September 04, 2013, at 7:13 PM, bufnyfan1 wrote:

    "I suggest shorting TSLA at any price above $140"-

    -Gee why?? so you can get in at lower price because you missed out on the run up from $25???

  • Report this Comment On September 04, 2013, at 10:23 PM, eweichselbaum wrote:

    To add to the short squeeze of course. ;)

  • Report this Comment On September 05, 2013, at 8:07 AM, drax7 wrote:

    EV is the future. Tesla has the lead and its increasing.

    Their technological lead and infrastructure lead is years ahead, once they master the production/ supply chain process, which is improving rapidly, they will reach gross margins above 25%. That is their escape velocity, self sustaining economically to expand further.

  • Report this Comment On September 07, 2013, at 8:46 PM, highgrowthcarson wrote:

    Exactly so. Over at Seeking Alpha, where I used to write articles, no one seems to understand this all too obvious thesis. For high growth disruptive stocks -- the ones you guys call rule breakers -- the size of the addressable market, the technological or other kind of protective moat, the potential for large profit margins, the slowness or weakness of the competition and the excellence of management are what matters. Attempting to apply accounting/valuation protocols based on recent profits or short-term projected profits is worse than useless. Tesla is the textbook rule breaker.

    My only quibble with you Daniel is this: If Tesla can produce a 400hp, gorgeous 200+ mile range, almost free fuel car for 35k they will sell millions, not hundreds of thousands. A big if, but looking more possible every day.

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