Analyst: 500,000 Annual Tesla Cars by 2020 Is "Not Particularly Lofty"

Analysts are weighing in on Tesla. Despite enormous potential for the company, is all the glory priced in?

Mar 26, 2014 at 7:43PM

Honda and Toyota will both launch fuel-cell vehicles for the consumer market in 2015, according to Reuters, citing a Nikkei newspaper. As another feasible zero-emission alternative to electric vehicles, fuel-cell technology is often paraded as a superior green choice to lithium-ion for the future automotive market. With fuel-cell consumer vehicles so close to market, it poses a question: Will the new competition threaten Tesla's (NASDAQ:TSLA) growth story? One analyst doesn't think so.

Tesla Model S Frunk Tmf

Model S.

Tesla's growth story isn't lofty
Deutsche Bank analyst Rod Lache (via Barron's) doesn't see the competition as a threat to Tesla as the electric car-maker. A key factor to his confidence, he says, is Tesla's growing list of competitive advantages. Further, it's not that Lache doesn't see potential for fuel-cell vehicles; he simply thinks that Tesla's aspiration to sell 500,000 vehicles per year by 2020 isn't as lofty as it sounds.

Let's give Lache the floor for a moment.

[W]e don't believe that that Tesla's market share objectives (including a 500,000 unit target by 2020) are not particularly lofty. We'd note, for example, that the BMW 3-Series sells 538k units per year, including 120k in the U.S., and it achieves 30% of the global small luxury sedan market; Tesla's Model S has already achieved 13% of the market for vehicles in the $70k-$110k price range in the U.S. market. And BMW faces significantly more developed competition in the premium sedan market than Tesla faces in the EV market.

Or here's another way to look at it. Tesla's supply limited success in North America is key evidence the Model S will be competitive globally, too. So, in the near term, as Tesla continues to aggressively expand production of its luxury vehicles for a global rollout, Tesla can easily reach annual deliveries above 100,000 in a few years. Longer-term, the demonstrated proven value proposition of the Model S offers evidence that Tesla's planned lower-cost car will also be a compelling option in a much larger addressable market.

And just putting Tesla's size today into perspective relative to the addressable automotive market shows that even at 500,000 vehicles per year, Tesla would still be a niche player. The Mercedes-Benz brand sold about 313,000 vehicles in 2013 in the U.S. alone. Mainstream manufacturer General Motors sold 9.7 million vehicles in 2013.

Model S Facebook

Model S. Image source: Tesla Motors.

But price matters
Despite Tesla's big growth plans that seem rather reasonable, Lache reminds investors that price matters. Based on his valuation, all of this opportunity is already priced into the stock. He has a "neutral" rating on the stock and a price target of $220.

Another analyst call made rounds today with a similar take on Tesla stock. UBS analysts Colin Langan and Rahul Chadha initiated coverage on Tesla this week with a neutral rating for the stock and a $230 price target. Acknowledging the company's growth potential, they also advise investors to keep in mind that there is material downside risk with so much success already priced in.

The failure of a current or future product could quickly unravel all the progress. Moreover, we'd expect more luxury competitors to respond over the next few years given Tesla's initial success.

The potential for Tesla's underlying business is enormous. But investors who want to buy into the stock at today's prices should keep positions small. Given the robust expectations priced into the stock, downside risk is nearly equally is prevalent as upside opportunity.

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Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends, General Motors, Netflix, and Tesla Motors and owns shares of, Netflix, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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