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

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.

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. 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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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 March 26, 2014, at 9:21 PM, CAGriffinX2 wrote:

    As hinted by Elon Musk, if China's sales drastically exceed expectations, Tesla may have to build a factory in China just to supply all of SE Asia. A factory there would also boost Chinese sales even further, because Tesla's cars would then qualify for the government incentives they have on purchasing EVs that are "made in China". Currently there are NO incentives at all when purchasing a Tesla there.

  • Report this Comment On March 26, 2014, at 9:31 PM, CAGriffinX2 wrote:

    I forgot to make my point in my last post, which is that Tesla's Fremont, CA factory has a capacity of putting out 500,000 cars per year, but with another factory in China (and maybe other future factories built elsewhere), we could see annual production numbers far higher than 500,000 by the year 2020.

  • Report this Comment On March 26, 2014, at 9:42 PM, TMFDanielSparks wrote:

    Good point CAGriffinX2

  • Report this Comment On March 26, 2014, at 10:40 PM, jameshall69 wrote:

    Here we have the weekly Tesla pump story. I have noticed that the hype from This author and frequency of story without any substance is proportional to the stock price. the more the stock falls the higher frequency of stock pumping. Be honest, do Tesla pay you to put these articles out every week?

  • Report this Comment On March 26, 2014, at 11:02 PM, dlwatib wrote:

    For a "pump story" this one's pretty neutral. Not a lot of hype about how Tesla is going to have enough capacity left over in its gigafactory to revolutionize the electrical grid.

    My own point of view is that 500K cars per year is going to seem pretty limiting as soon as the Gen III car starts selling. I expect that they're going to want to build another gigafactory almost as soon as the first one goes into production.

  • Report this Comment On March 26, 2014, at 11:11 PM, Ustauber wrote:

    ThxTsla

  • Report this Comment On March 26, 2014, at 11:12 PM, erich69 wrote:

    Who has the money to buy all these cars? The Tesla S is a fantastic car that is not affordable to the average person. There are several hybrid models already available to eco-conscious folks. The major car manufacturers are already steps ahead of Tesla working on hydrogen cars. Tesla may have a great car, a great CEO, growing sales, but none of this justifies the valuation of the company with a product most people cannot afford, and those who can afford it may not be eco-conscious and spend their money on flashy sports cars or other luxury models.

  • Report this Comment On March 27, 2014, at 7:33 AM, JulianCox wrote:

    "fuel-cell technology is often paraded as a superior green choice"

    What is actually is, is a PR hoax that is based on the product of Fracking and Steam Reforming of Natural Gas. The product is sold as green as an assault by the fossil fuel industry on the renewables sector as it begins to take market share.

    Investors and consumers beware, this hoax cannot survive exposure to the light of day.

    Here is the "green" hydrogen:

    Saudi Aramco Hydrogen

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    Air Liquide Hydrogen Production Process

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    Total Hydrogen:

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    Petrobas Hydrogen:

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    Rosneft (Russia) Hydrogen:

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    Quatar Petroleum Hydrogen:

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    Shell Hydrogen:

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  • Report this Comment On March 28, 2014, at 11:51 PM, EFRROS wrote:

    Exactly, don't buy the hydrogen fuel cell hoax. It requires tons of energy to extract hydrogen from any source!

  • Report this Comment On March 29, 2014, at 11:48 PM, GenevieveHawkins wrote:

    I think Tesla's strategy is a bit like a diamond producers of encouraging growth through a bit of scarcity. On their call a few quarters ago they talked about the backlog of orders in China with the affluent class. Perhaps the environmental aspects get more attention in America and Europe, but Tesla is not like any other car. It's a status symbol, which means a lot in some nations. They just have to get their supply chain in order.

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