Is Tesla Motors Inc. Actually Worth Its Underdog Premium?

Tesla's price-to-sales ratio is currently about 11 times the size of that of any of its competitors. Let's look at why that might be, and what its long-term business strategy says about the company’s future valuation.

May 28, 2014 at 7:03PM

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.

S Sun

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.

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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.

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

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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.

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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.

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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.

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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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Leah Niu owns shares of Tesla Motors. The Motley Fool recommends General Motors and Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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