Tesla Rolls a Million-Dollar Car off Its Assembly Line

The luxury car market is filled with pricey machines that can, in many cases, crank out insane amounts of horsepower. The Bugatti Veyron is perhaps the quintessential example when it comes to luxury sports cars, with its latest version capable delivering 1,200 horsepower and setting purchasers back in excess of $1.3 million.

When I think of luxury cars I also think of Tesla Motors (NASDAQ: TSLA  ) , but perhaps not in the same sense as Bugatti, Lamborghini, and McLaren. Tesla is certainly pursuing a niche middle- to upper-income consumer who values a socially responsible lifestyle and simply wants a more than comparable all-electric vehicle.

The results thus far demonstrate that Tesla has delivered on that promise, with its entire 21,000-car output in 2013 spoken for well in advance of production. Tesla was also able to top its own production estimates in each of the past three quarters while turning in profits – albeit adjusted and enhanced with EV credits – over the past two quarters.

Part of this credit has to go to CEO Elon Musk for delivering on his promise to bring a mass-marketed electric vehicle to the public. The other half relates to the actual design of the vehicle which, I won't deny, looks pretty stunning.

Source: Tesla Motors Events, Flickr.

Tesla's $1 million car... sort of
Whether you realize it or not, Tesla just yesterday rolled a $1 million car off its assembly line. It's not a car with 1,000-plus horsepower, it won't jump from zero to 60 in less than three seconds, and it wasn't personally handmade by Musk himself. In fact, the manufacturer's suggested retail price on the vehicle is just $70,000, but Tesla investors are perfectly OK bidding that car higher in excess of $1 million!

Don't believe me? Let's have a look at my favorite price-per-car tabulation that I've been tracking for fourth straight months:

Company

Market Cap

2012 Production

Value/Car

General Motors (NYSE: GM  )

$48.7 billion

9.288 million

$5,243

Ford (NYSE: F  )

$66.2 billion

5.708 million

$11,598

Toyota (NYSE: TM  )

$198.6 billion

9.692 million

$20,491

Honda Motor

$68.3 billion

3.137 million

$21,772

Tesla

$22.2 billion

21,000*

$1,057,143

Source: Individual company annual reports, Yahoo! Finance, author's calculations. *Projected 2013 production. Data as of 10/07/2013.

By all accounts, Tesla investors have gone straight past crazy, driven through Gary Busey-ville, and set up camp in Charlie Sheen-town. Despite forecasting the production of just 21,000 vehicles this year, Tesla investors are valuing its $70,000 Model S at more than $1 million per pop all while traditional car manufacturers like General Motors and Ford receive Wall Street valuations of roughly $5,200 and $11,600, respectively, per vehicle.

GM is still recovering from the damage its brand value took from the automaker's 2009 bankruptcy, but it's hard to understand Ford's low value per car given its recent string of fuel-efficient vehicle success thanks to EcoBoost engine technology. Even Toyota is more impressive than Tesla, producing more cars in one day than Tesla has produced since its inception in 2003!

What you don't have to worry about with Tesla
First off, let me begin by saying exactly what the Fool's disclosure statement is going to say below – that I am, indeed, a short-seller of Tesla Motors. There's no hiding the fact that I'm strongly against its current valuation. However, I'm also in agreement with certain factors that aren't a problem for Tesla.

For instance, last week's YouTube video of a Tesla Model S burning up on the side of the road isn't a concern. As Fool auto guru John Rosevear points out, concerns over new car technologies have prevailed for some time now, but Tesla's response and the actual circumstances surrounding the fire are no cause for concern. In addition, the Model S in August received the highest safety rating ever given out by the National Highway Traffic Safety Administration.

In addition, I also believe Tesla has clearly overcome some of the key hurdles associated with building an electric vehicle. I certainly believe there's a future in EVs and Tesla clearly has the upper hand on any other industry titan that may choose to enter the fray, giving it a clear competitive advantage for now.

Why you should be worried about Tesla, and why I'm short
But there are other variables here that make absolutely no sense and give me reason to hold steady in my short-sale stance for Tesla – if not add even more.

To begin with, look at the overall strength in the auto market – it's unsustainable. With auto sales expected to top 16 million units this year, which would mark a six-year high, just how much can we really expect the marketplace to further improve? Just before the dot-com bubble hit, annual auto sales reached 17.4 million units before tapering to approximately 16 million immediately prior to the recession. Automobiles are getting better gas mileage and lasting longer now, so there's little reason to believe we're going to surpass the 16 million-17 million unit sales mark anytime soon. Consider for a moment just how little Tesla is contributing to this figure with its 21,000 vehicles. That's just 0.1% of total car production this year and it's not as if Tesla can build the Model S any faster than it currently is, so there's no way for it to take advantage of this latest mini-boom in autos.

Another factor to consider is that long-term lending rates have been on the rise since May despite a recent small retreat. Low lending rates have been a major impetus behind this surge in vehicle sales, but I'd conjecture much more so for higher-priced vehicles than those with a lower price point. A small change in interest rates can greatly affect the monthly interest rate charge for luxury category vehicles like Tesla's Model S, making fuel-efficient options such as the Ford Fiesta or Toyota Prius a potentially smarter, less pocket-altering choice.

Don't forget about these worries, either
There are also multiple other factors that you've probably heard previously and I've certainly touched on before that deserve some rehashing.

Perhaps nothing stands out as a greater threat to Tesla than its own execution. I'm perfectly willing to admit that Tesla's met or beat its production guidance in the past three quarters, but prior to that it was one production target pushed down the road after another. In fact, the company's complementary SUV, known as the Model X, was pushed an entire year down the road from its previous production date. Musk is undoubtedly a revolutionary, but his ideas often take time to implement. This current valuation comes with the assumption that everything will run perfectly for the next five years when Tesla's history would indicate otherwise.

Source: Tesla Motors Events, Flickr.

Another concern would be the actual production expansion that is around the corner. Tesla's plans are to double Model S production next year while also introducing the Model X in its Fremont plant. All the while, Musk plans to look for opportunities to expand into Asia, Europe, and perhaps other parts of the U.S. with factories.It's a solid plan, but it's unlikely to be executed without hiccups.

Don't forget about Tesla's competition. While Tesla has the competitive advantage, it isn't going to have all EV sales to itself. BMW (NASDAQOTH: BAMXF  ) may get little respect when it comes to electric vehicles, but it recently introduced the cheaper i3 and the luxury i8 to market with the intent of stealing Tesla's customer base. The i8 is more of an electric hybrid, but the i3 can run up to 100 miles on electric power or 190 miles if consumers purchase the optional range extender. This does still give Tesla the better range of the two, but the BMW will be more than $20,000 cheaper. Let's also not forget that other electric options do exist including the Nissan Leaf and GM's Chevy Spark.

Finally – yes, you're going to hear it again – where's the infrastructure? Sure, people with a house can plug their car into a garage outlet, but what are condo or apartment residents supposed to do? What about cross-country trips? Tesla's target audience, due to the car's $70,000 price tag and lack of current infrastructure, is actually a small group, which significantly narrows its profit potential.

I find it hard to fathom how Tesla could possibly head even higher from current levels when it still has so much left to prove to the markets. I for one am short and have been given no reasons to believe that Tesla deserves even half of this current valuation.

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Read/Post Comments (13) | Recommend This Article (5)

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 October 08, 2013, at 5:21 PM, JRUwing wrote:

    Hey Sean, how are you valuing their proprietary technology and licensed contracts with other manufacturers?

  • Report this Comment On October 08, 2013, at 6:08 PM, lem2004 wrote:

    Sean, boy you are going to really get bashed now.Have you seen what happens to others that have written anything negative about tesla on seeking alpha?It is unbelievable!

  • Report this Comment On October 08, 2013, at 6:10 PM, weaponz wrote:

    Well a million per car is about how much evs with similar electric range to the Tesla go for. That said, Tesla is estimated to sell 23-25k cars this year.

    As for how big the market will get? well lets look at it this way. The moment people start converting to electric cars, the cars sold per year will probably hit double current numbers during that period until most cars on the road will be electric. On top of that, with self driving becoming the norm, and cheap fueling prices. More people will end up buying cars. On top of that, EVs have one advantage, they can have much larger profit margins due to how technology gets cheaper every month, so your profit margins grow every month.

    And please, the current and short term competition is a joke.By the time they make comparable cars Tesla will already be their size.

    As far as infrastructure goes, most of it is already there. It is just a matter of rewiring. That said, most owners of cars do have their own houses and they are the likely first adopters. Otherwise, places with large cities like CA and NYC have all committed to building out public EV infrastructure.

    Cross country trips are rare and many people even rent not to put miles on their car. Overall though Tesla plans to have 98% of US covered for long distance driving by end of 2015. EU will also be mostly covered by then.

  • Report this Comment On October 08, 2013, at 6:19 PM, Pixma25 wrote:

    Using your metrics for GM, for example, a car company's value is 32% of the average price of a car sold that year ($16,000) * the number of cars sold (9.2M). (9.2M*16K*.32 = 47B market cap)

    If we apply this formula to Tesla $90,000 average sale price times 21,000 times 32%. (21K*90K*.32 = 604M market cap) which would make TSLA shares about $13.65.

    Would you say that's your target price for the stock?

  • Report this Comment On October 08, 2013, at 7:16 PM, SteveTG3 wrote:

    Sean, you do realize the "Dollars per Car" number you've written about has no reliability.

    In 2009, each day GM stepped closer to bankruptcy, it's stock trading lower and lower, its "Dollars per Car" would have moved lower and lower, and your reading of this number would have told you with ever increasing conviction that this was the greatest buying opportunity ever for investors in the automobile sector... until the day you found the shares no longer available to buy due to the company's bankruptcy.

  • Report this Comment On October 08, 2013, at 7:37 PM, Ustauber wrote:

    Sean,

    Have you seen the thousands of 2013 models at your Elite car group are waiting to be sold at big discount prices cause your 2014 models have no place to be stored.

    Can you also tell me of any back order of any car models of this Elite companies.

    If GM has so much profit, why they don't pay all the money that was giving to them for the Bail out.

    You should also look at the amount of GM and Honda recalls.

  • Report this Comment On October 08, 2013, at 11:10 PM, ifool100 wrote:

    Overlooking an obvious bias in your thesis, it is true that Elon himself sees the current price as pretty steep. As with any company fueled by high expectations it's important to have an exit strategy. Yet it's interesting how from about $38 a share, the shorts have lost every time. They remind me of Barry (Jerry Seinfeld) in Bee Movie (2007) repeatedly trying to go through a closed window "'maybe this time, maybe this time, maybe this time!"

  • Report this Comment On October 08, 2013, at 11:47 PM, Seedye wrote:

    Sean,

    This is a big improvement over your last Tesla article. However, your fundamental flaw in your argument is the same: if the stock price is inflated due to investor exuberance more than company performance, then the necessary catalyst to drive the stock price down would be loss of investor exuberance. You haven't shown any evidence that the "worries" for Tesla have investors that worried.

    The enthusiasm level is high enough that it'd take some pretty bad news to seriously affect the stock -- apparently a dramatic viral video of a Tesla car on fire was not enough to do much damage.

    As far as the "worries" you describe, you really should stop using the volume comparison. It's asinine to compare the sales volume of a ten-year old company to the 75-year old market leader. How about comparing Tesla now with Toyota at year 10, or Toyota from the 1970s?

    Additionally, your infrastructure argument is just wrong. If I had said a decade or so ago that WiFi wouldn't take off because only people with electricity can use it, people in condos and apartments might have challenges, and you have to ignore the sales growth of WiFi devices and the growth of WiFi hotspots, and just compare the count of current WiFi hotspots to ethernet sockets, etc...well, you'd say I was an idiot, and you'd be right.

    I sold most of my Tesla shares when I was up 300%, but I'm keeping a few shares since I like the company, my stake is small, and my cost-basis is tiny. There's as many reasons to buy, hold, sell, or short a stock as there are investors. Every investor should weigh their risks against the potential rewards and act accordingly, and ideally, articles at Motley Fool would help investors do that.

    This is not one of those articles. At best, this article only helps one person -- Sean Williams. A more helpful article would lay out the parameters of shorting this stock to optimize returns, how to assess the risk of shorting it, how to mitigate that risk, and compare vs. holding or buying.

  • Report this Comment On October 08, 2013, at 11:53 PM, SteveTG3 wrote:

    Seedye, spot on, point after point.

  • Report this Comment On October 09, 2013, at 12:13 PM, jeffhre wrote:

    The problem with your one car = 1 million dollars hypothesis is that it only accounts for the car and doesn't account for the platform. The platform will carry at least 3 vehicles and the derivative gen III platform will account for a few more than that.

    Perhaps not dropping the actual per car valuation into "Hondaland" yet, (by the way Sheentown is a way stop before Buseyville, and if Tesla can put enough versions of sheet metal over their skateboard platforms, their investors may still not be too far out past Hasselhoff Village).

  • Report this Comment On October 09, 2013, at 12:20 PM, jeffhre wrote:

    Pixma25, is the $13.25 forward or trailing, LOL.

    Sean, I don't know about you, but if I had to guess regarding a short position, the market can stay irrational much longer than I can stay solvent.

  • Report this Comment On October 09, 2013, at 12:53 PM, ffbj wrote:

    So you say that Tsla is probably worth less than half of its current value. So around $80 per share, although $60, $50, even $10 per share is less than half its current evaluation. That's one reason I hate imprecise wording. So lets say you meant to say Tsla is worth half its current valuation. Ok. Then the articles title would replace 1million with 500 hundred thousand. I think you can see what I am trying to get at, and that is your metric of evaluation is askance.

    One other fool worked it out to a value of around $14

    a share. Ok, so maybe you were just trying to point out the ridiculous evaluation.

    You make points that seems slanted, prejudicial vrs. Tsla, which are weak.

    Bmw is coming out with some electric cars.

    So what, the 8 is more expensive by around $50k

    while the i3 is seen by most as little competition.

    Tsla's got a lock on the luxury ev market and probably will have for many years. What is that worth?

    I do think there will still be bumps in the road and agree that the stock is overvalued. I see $125 - $150 trading in that range. There you have some specific numbers. But roll outs and expansion into Europe and China, are not, as you seem to believe, negatives for the stock. They are positives. Aside from the delay of model x everything else Tsla said they would do they have done, in spades.

  • Report this Comment On October 09, 2013, at 3:34 PM, dlwatib wrote:

    So what is the market cap/car of Volkswagen AG these days? Don't they own Bugatti?

    It's just as much a fallacy to compare car companies on the basis of market cap/car as any other measure that fails to take into account reasonable projections for the future.

    I know you're just trying to make a point, but the point needs to be made in the right way so that it makes sense. Since TSLA clearly is being valued on the basis of expected future growth, it only makes sense to ask: How long must one wait at this price for future growth to bring the company into line with a P/E competitive with its industry? Calculate accordingly using fairly rosy assumptions for growth curves.

    If the answer is, for instance, that someone buying into the stock at $175 will have to hold it for 7 years (to pick a number at random) to get to a P/E like Honda's then people might easily and fairly see that the company (though excellent) is overvalued, because, assuming they buy a share today at $175 they should not logically expect to see any price appreciation for the next seven (7) years, and may well see downward adjustments in the meantime.

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