I have been cautiously optimistic about Tesla Motors (NASDAQ:TSLA) since before they went public in 2010. And after the most recent capital raise, which zeroed out the possibility of a near term liquidity problem, I became much heavier on the optimism and much lighter on the caution. In fact I opened up short-term positions mostly due to near term catalysts (deliveries, production ramp, profitability) which I would like to see turn into long-term investments. The Model S has already been a home run, maybe even a grand slam if they exceed sales targets for 2013. But there is still reason for caution, just like any growth/startup. Now that the liquidity problem is out of the question, the biggest threat is perhaps its valuation. TSLA's price/book value is sky high right now, over 50 and the highest in the auto sector. Even as a firm optimist for TSLA, I have to admit that its nearly 4 billion dollar valuation is not even close to being matched by their balance sheet. Simply put, and as many shorts may be counting on, TSLA is very overpriced. But is it really that overpriced?
Metrics like price to book value are designed for comparing established companies within the same industry to each other such as GM (NYSE:GM) and Ford (NYSE:F). While still useful with context, valuation metrics have to be carefully applied to growth companies like TSLA, especially at critical points in their development. It is hard to judge the productiveness of an apple orchard if it was just planted last week. So accepting that TSLA is overpriced at the moment, how soon could the book value start to match market value? Probably a lot sooner than most assume, even with conservative estimates. A 4 billion dollar valuation might look quite distanced from TSLA's nearly zero book value, but it might not be that far.
TSLA's simple plan is to progressively make each car it produces cheaper, thus selling them in ultra-niche markets and eventually hitting mainstream markets. They started with the very high priced Roadster in very limited production, now the Model S and in 2014 the X in higher production, and in 2015 or hopefully sooner they plan to introduce a truly mainstream model that will compete with the BMW 3 series. We also know that TSLA plans to sell 20,000 Model S in 2013 at a 25% or better margin. And perhaps most importantly, we know that in 2013 TSLA should become profitable for the first time, not just cash-flow-positive as Elon Musk recently tweeted. So in other words, we can expect TSLA's balance to become more robust in the coming years, even if they do not quite meet expectations. Keeping this in mind, let's see how the numbers project:
-20,000 Model S sold in 2013 @ avg of $75,000 (midrange of prices)@ 20% margins (5% less than guidance) TSLA will have $300,000,000 in profits solely off the Model S in 2013.
-For 2014, let's estimate that they sell 15,000 Model S and 10,000 Model X @ avg of $75,0000. At 20% margins this will yield $375,000,000 in profits.
-Then in 2015, where they plan to introduce the first mainstream market vehicle (something that could potentially sell over 100,000 vehicles a year) TSLA could be looking at over .5 billion dollars in profits.
The above projections, which I want to reiterate are very conservative compared to guidance and especially estimates of other TSLA optimists like myself, would bring TSLA's valuation metrics down to vastly more palatable levels very quickly. What is more intriguing is that only small raises in the optimism of the estimates can make the outcomes vastly more robust. For example, if we assume for 2013 TSLA sells 22,000 Model S at an average price of $80,000 and a margin of 28%, that will yield TSLA almost .5 billion in profits (492 million) in 2013, not including other income. Considering that the reservation rates for the Model S have increased to over 50 per day (over 15,000 in total), even the less conservative projections do not seem so hard to fathom.
So is TSLA overpriced? Sure, but maybe not for long.