Is Tesla Motors Inc. Actually Worth Its Underdog Premium?

Tesla Motors  (NASDAQ: TSLA  )  is an underdog in an industry full of heavyweights. Part of Tesla's draw is in its youth, hunger, and unique operational approach. This fighter has a high premium for good reason: Its potential seems limitless.

To say that Tesla has a lot to prove is an understatement, but what underdog doesn't? With price to sales valued at 11 times that of Toyota Motor Corporation  (NYSE: TM  ) , Daimler, or General Motors  (NYSE: GM  ) , Tesla has a healthy bite to go along with the company's commanding bark.

Source: Tesla Motors

It's not the size of the dog in the fight...
Part of Tesla's draw is that it doesn't currently have any direct competitors, which allows it to expand its market share relatively unencumbered. In order to make it a fair fight with Tesla, another company would have to have a nationwide charging infrastructure in place, provide a fully electric motor, and be classified and priced as a luxury vehicle.

In a 2013 conference call, Tesla's CEO Elon Musk mentioned a few vehicle manufacturers that customers most commonly switch from when purchasing a Model S. Toyota and Daimler, makers of the Prius and the Mercedes Benz brands, respectively, were two of those mentioned. We'll throw General Motors in there as well, since it's an American brand (like Tesla) and makes the Cadillac ELR, a luxury hybrid.

The Prius fleet will likely prove a worthy competitor to Tesla's Gen III. Source: Toyota Motors

While Toyota's Prius doesn't compete with the Tesla fleet to date, it will be a contender when Tesla's Gen III gets on the road. Sure, Toyota is working on its FCV model, a hydrogen fuel cell hybrid that will have a driving range comparable to range of the Model S, but at last count there were 11 hydrogen fueling stations in the U.S. which simply does not compare to the availability of Tesla's Supercharger network.

A map of the 11 hydrogen charging stations. Source: Alternative Fuels Data Center

Tesla's Supercharger network as projected for the end of 2015. Source: Tesla motors.

Daimler's Mercedes Benz E-class and GM's Cadillac ELR vehicles still rely on fossil fuels, and thus aren't worthy Tesla competitors either.

Sure, these carmakers don't directly compete now. If all goes well and Tesla wins a few rounds, however, the EV maker will be pinning the heavyweights on the ropes in no time.

No matter how you spin it, the ELR is still just a hybrid. Source: GM

...but the size of the fight in the dog
As mentioned above, Tesla's price to sales is valued at about 11 times Toyota, Daimler, and GM's.


Price to Sales









Source: Yahoo Finance

There is a lot of anticipation and curiosity surrounding Tesla's future. The company is a grade-A disruptor that is realizing its own growth potential. It is Tesla's youthful agility combined with the company's prospective accomplishments that truly accounts for its premium valuation.

At this point in the company's narrative, investors have to ask whether Tesla's stock will be able to keep its premium valuation as it matures.

Be the best, beat the rest
The EV maker is positioned for high growth (entering into new markets, building out its fleet, and expanding its focus to include batteries and external power storage); this has a lot of sway, as far as valuation goes. The company's long-term business strategy is what really matters for your portfolio, though.

Moving up, branching out. Source: Tesla Motors

There are three vital attributes that inform Tesla's long-term business strategy: focus and agility, operational transparency, and first principles thinking.

Focus and agility
Instead of spreading itself too thin in order to expand its product offerings (as is the industry standard), Tesla has kept its focus laser sharp by offering a boutique product line, building out one model at a time. This "project tunnel vision" provides Tesla with a unique agility through which it can assess and mitigate risk in an efficient manner.

A key component of Tesla's culture is the company's focus on constant innovation, exemplified by the seemingly endless design tweaks and persistent beat of improvement witnessed in the Model S launch. Additionally, Tesla has ensured that its software has the capability to recall or update the company's fleet wirelessly. This makes the company's risk response time a fraction of others in the industry.

Tesla's corporate cultural values. Source: Tesla Motors

First principles
Reasoning from "first principles" offers an innovative way to look at and question the world around us. Essentially, Tesla observes and works from the most fundamental truths, and then uses reason and logic to move up from that basic foundation.

This type of reasoning has brought us the world's safest car, will likely drive down the cost of lithium-ion batteries, and will solidify Tesla's spot in the EV ring.

Operational transparency
Tesla is a breath of fresh air when it comes to socially sustainable practices. Since the company's culture dictates that it should "Think Like Owners," Tesla has been nothing if not forthright in taking ownership and holding itself accountable for any and all hiccups it has faced.

Prioritization of driver experience has become synonymous with the Tesla brand. Source: Tesla Motors

Having built its reputation on being fair, it stands to reason that Tesla will continue to govern and present itself as a honorable company that will not compromise value for price or experience for fads. It will be interesting to see how well Tesla handles future events that may prove to be a bit more cumbersome to navigate than a few car fires.

Fight with all your might
Tesla has built a strong foundation of entrepreneurial drive, design innovation, and honorability that will see it through what will prove to be the company's most formative years yet.

Tesla's growth potential, the lack of viable competitors as of yet, and the company's long-term business strategy all inform the premium valuation we're seeing at present.

I don't know about you, but I sure do love rooting for the underdog... especially when it has a hook like Tesla's.

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Read/Post Comments (8) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On May 28, 2014, at 7:18 PM, Ustauber wrote:


  • Report this Comment On May 28, 2014, at 10:26 PM, deeageaux wrote:

    Superchargers are not the half of it.

    You can't refuel a fuel cell vehicle at home.

    You can with a battery electric vehicle.

  • Report this Comment On May 29, 2014, at 12:09 AM, foolsparadise wrote:


    BEVs in various types have been around for more than 100 years. Tesla differs from others in that they made a attractive, practical, safe car that performs as good as any luxury car on the market. But innovative? Li-ion batteries have been around for sometime and are made by Panasonic. What Tesla has done is to stack them up to get a higher voltage.

    And electric motors have been around for donkeys ears. Contrary to popular belief most parts for Tesla , including the and power train, are jointly developed with Mercedes and Toyota.

    Batteries and the law of diminishing returns--

    Limitations that plagued earlier BEVs still remains.

    1. longer range requires larger batteries

    2. Bigger the battery longer it takes to charge

    3. Bigger the battery the heavier it is ( use up energy to move)

    4. Bigger the battery more costly it is

    5. Faster you charge the shorter the life span of the battery

    6. At present 90% electricity is by burning Fossil fuel.

    This is why the bigger fish - Toyota, Hyundai, Honda and Mercedes are having their bets on Fuel cell powered vehicles. Hydrogen is very light and at present is very cheap and burns cleaner than Gasoline or diesel. Until we can develop a more powerful battery - Fuel cells are here to stay.

  • Report this Comment On May 29, 2014, at 12:31 AM, foolsparadise wrote:


    Many towns in US goes without power for weeks on end after typhoons and hurricanes. If the grid is down for weeks what use is your BEVs? Never put all your eggs in one basket. Grid failures are common even in US. That's why most institutions, hospitals and malls are having back up generators -- and now Fuel Cell generators. Tesla is an excellent second car to commute to work and back. If you are going fishing with your whole family and the dogs( fully loaded0... . or going off-road.. or to the beach -- leave your Tesla at home. If it gets stuck on a beech - the battery will drain very quickly.. and you won't be able to find a supercharger on the beach.

  • Report this Comment On May 29, 2014, at 2:00 AM, abigchocoholic wrote:

    While Toyota's Prius doesn't compete with the Tesla fleet to date, it will be a contender when Tesla's Gen III gets on the road.


    Yeah, that's so far off it's really offensive to even mention it. Right now it's not feasible. It can't be made for an affordable price.

  • Report this Comment On May 29, 2014, at 10:12 AM, corrado wrote:

    after this is its time to sale!!!!!!!!!

  • Report this Comment On May 29, 2014, at 4:32 PM, Pricha100 wrote:

    Fuel cells are not here to stay. They practically aren't even here at all as far as cars are concerned. There is essentially no infrastructure, where as the electric grid is already ubiquitous. Musk has also already said that Tesla's charging stations will be capable of using solar energy in the future. This means that if the grid fails, the cars can still be charged. This is their "zombie apocalypse" guarantee. Electricity can also be generated by many different means, not just fossil fuels. And last i checked, those hydrogen fuels are still coming from natural gas which hardly makes them clean from well to wheel. That part is just a hoax fuel cell people tell others to get them to buy into the stocks. It also takes just as much energy to extract the hydrogen from the gas, so its not efficient yet either. If it was, then this technology would have taken off 10 years ago when people were first all hyped up about it.

    Battery technology will continue to improve. Musk's entire company is investing to make this happen. They will make better batteries more efficiently and at a lower cost, and they will continue to increase the number of supercharger stations around the country.

    The point is, electric cars make much more sense. They already have the electric grid infrastructure in place. They can draw from alternative non-polluting AND renewable energy sources. They run clean. Fuel Cell cars cannot match this, and very likely never will.

  • Report this Comment On May 29, 2014, at 4:40 PM, Pricha100 wrote:

    Also for those people saying that you have to wait too long to charge a battery. Please see this video

    They swapped a battery in 90 seconds. And they did it for two cars in the span of time they needed to fill a car's gas tank.

    As Musk said. Superchargers will always be free to charge. Battery swaps they charge you a fee.

    So the only question is "do you want fast of free?"

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Leah Niu

Leah is a freelance writer for The Motley Fool. She is interested in socially responsible investing, conscious capitalism, and Tesla.

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