Tesla Motors (NASDAQ:TSLA) has built only a few thousand cars during its short lifetime, but it has already become a big deal. Its Model S sedan, Motor Trend's "Car of the Year," has found itself an avid following well beyond the eco-minded gadget geeks that made up most of the audience for electric cars before now.

That's huge. That Tesla has established itself, on a relative shoestring, as a credible competitor in a business with enormous barriers to entry is arguably an even bigger achievement.

It's easy to be enthusiastic about Tesla's prospects. But there are good, serious reasons to be cautious as well – enormous challenges still lie ahead for the upstart Silicon Valley automaker. I created a premium research report on Tesla to help investors understand those challenges, and the opportunity presented by the company.

Following is an excerpt from the report, laying out Tesla's opportunity. We hope you enjoy it.

Tesla Motors' Opportunity
Are electric cars the future of personal transportation?

That question continues to be hotly debated by experts and investors. But whether electric cars become the solution, or merely one solution among several, Tesla Motors is striving to position itself to capture an outsized piece of whatever market emerges for electric cars.

To date, Tesla has taken over 10,000 "reservations" – orders accompanied by cash deposits – for its Model S, an all-electric luxury sedan priced to compete with similarly sized offerings from brands like BMW (OTC:BAMXF) and Audi. Early reviews of the Model S, which began production in June, have been promising — the car appears to deliver on Tesla's ambitious goals, with impressive range, good build quality, and excellent on-road capabilities.

The Model S is a good product — and an impressive achievement. This cannot be overstated: Tesla CEO Elon Musk and his team have executed very well on their go-to-market plan since the company's IPO. Investments from the likes of Daimler (OTC:DDAI.F), Panasonic (OTC:PCRFY), and Toyota (NYSE:TM) gave the company credibility within the auto industry and with key suppliers, and thoughtful hires of industry veterans from companies like Volkswagen (OTC:VWAGY) gave it the experience necessary to bring a complex product to market in a highly regulated environment.

Long story short, it's hard to fault Musk's management over the last couple of years.

Still, much more will need to go right to justify an investment in Tesla at its current price, which is over 100 times estimated 2013 earnings. Tesla expects to deliver 20,000 cars in 2013, which sounds like a modest goal given that the company already has over 10,000 orders. But that would represent about 8% of the market for luxury cars above $50,000, The Wall Street Journal estimates, a market share not far from that held by brands like Cadillac and Audi. Finding a critical mass of customers willing to take a risk on a new company offering a new automotive technology beyond the early adopter "gadget geek" faithful who have already placed their orders may prove to be a challenge.

Even if Tesla meets its 2013 sales goals, this level of sales won't come close to justifying Tesla's valuation. The company needs years of significant growth to justify its current price, especially when a traditional automaker's multiple of around 10 times earnings is applied. But such growth would come with a conundrum: If Tesla's experience demonstrates that there is a significant, ready market for luxury-priced electric cars with good range, there is a slew of vastly better-funded competitors ready to pounce.

There's a fair argument to be made that Tesla was the first to bring a viable electric car to market — one with amenities, performance, and, most importantly, range comparable to a traditional gas-powered car. But they won't be the last. Already, companies like Nissan (OTC:NSANY) and Ford (NYSE:F) have brought electric cars to market on a small scale. While cars like Nissan's LEAF and Ford's Focus Electric have barely a third of the range of a fully optioned Model S, they're also significantly cheaper.

They're also best thought of as trial balloons, ways for their giant makers to test the electric-car waters with relatively modest investments. While Tesla has claimed a number of technological advances, and has several key patents, make no mistake: If there proves to be a sizable market for an electric luxury car with a 300-mile range, it won't take much time before the major automakers offer similar products.

That may not spell doom for Tesla. The company may well survive and profit as a niche maker of cars for technophiles, and as a supplier of electric drivetrains and technology to major automakers. The latter has already become a good side business for Tesla, which has supplied electric-car parts and expertise to Toyota and Daimler. But a niche automaker selling 20,000 or 30,000 cars a year will likely have a valuation in line with other automakers, around 10 times earnings. Even if Tesla doubles next year's consensus earnings estimates, that's about $5 a share, which would represent an 80%-plus loss from here. Even at 20 times earnings, it's a tough calculation to digest.

Looking for more insight?
That was just a sample of The Motley Fool's new premium report on Tesla Motors. If you're weighing whether the company is a buy or sell, this new report is an essential resource for investors seeking to understand the potential ups and downs of an investment in the electric-car manufacturer. Not only that, but the report comes with updated quarterly guidance and dives into upcoming catalysts on the horizon. Just click here now to get started.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.