Tesla Motors (TSLA) is one of the more controversial companies covered here on Seeking Alpha. To many, Tesla represents the future of the auto industry: clean, all-electric cars for the masses. And to others, Tesla represents a fool's dream: overpriced cars that do nothing to solve any environmental issues: As investors in Tesla, we believe in the company's trajectory and think that the company is poised to deliver solid results in 2013 (as well as the years to come). However, our thesis is not based on a belief in the "magic" of Tesla's cars, or the idea that Tesla will deliver clean cars to the masses. Rather, it is based on a simpler view: that Tesla is a luxury company, and that Tesla's cars are status symbols that the wealthy will willingly pay for. We have covered Tesla before, and spent a brief amount of time addressing this aspect of Tesla, and in this article, we wish to explore our view of Tesla as a luxury company in more detail. Tesla's head of sales is George Blankenship, Apple's former Vice President of Real Estate, and his imprint is already present in Tesla's stores and galleries. And it is these stores and galleries that we wish to delve into
Selling a Tesla: Placing Shiny "Toys" in Front of the 1%
Tesla currently has 22 (1 is set to open soon) stores and galleries within the United States, and the locations Tesla has chosen are no accident. Tesla's stores and galleries are located in some of the wealthiest states and communities in the United States, and we break down Tesla's U.S. store base below, utilizing median income data for 2011 provided by the Census Bureau (for reference purposes, the median U.S. household income for 2011 was $50,054).
Tesla Store & Gallery Analysis
Store/Gallery | Location | State Median Household Income (2011) | State Ranking | City Median Household Income |
Fashion Square | Scottsdale, Arizona | $48,621 | 30th | |
Topanga | Canoga Park, California | $53,367 | 18th | |
Menlo Park | Menlo Park, California | $53,367 | 18th | |
Fashion Island | Newport Beach | $53,367 | 18th | |
University Towne Center | San Diego, California | $53,367 | 18th | |
Santana Row | San Jose, California | $53,367 | 18th | |
3rd Street Promenade | Santa Monica, California | $53,367 | 18th | |
Park Meadows | Lone Tree, Colorado | $58,629 | 8th | |
Washington, D.C. | Washington, D.C. | $55,251 | 15th | $55,251 |
Dania Beach | Dania Beach, Florida | $45,105 | 39th | |
Lincoln Road | Miami Beach, Florida | $45,105 | 39th | |
Oakbrook | Oak Brook, Illinois | $50,637 | 22nd | |
Old Orchard | Skokie, Illinois | $50,637 | 22nd | |
Natick Mall | Natick, Massachusetts | $63,313 | 4th | |
Garden State Plaza | Paramus, New Jersey | $62,338 | 6th | |
Short Hills | Short Hills, New Jersey | $62,338 | 6th | |
Roosevelt Field | Garden City, New York | $50,636 | 23rd | |
New York City | New York, New York | $50,636 | 23rd | |
Westchester | White Plains, New York | $50,636 | 23rd | |
Washington Square | Portland, Oregon | $51,526 | 21st | |
Houston Galleria | Houston, Texas | $49,047 | 27th | |
Tyson's Corner | Tyson's Corner, Virginia | $62,616 | 5th | |
Bellevue Square | Bellevue, Washington | $56,850 | 11th |
*The size of San Diego, Miami, New York City, Portland, and Houston create disparities in median income data due to a wide range of neighborhoods. In San Diego, the seaside neighborhood of La Jolla has a median household income of $80,901. Median household incomes in Miami's wealthiest neighborhoods reach over $240,000. For the top 20% of earners in New York City was $223,285 in 2011. Within Portland, median incomes for the city's wealthiest neighborhoods reach well over $160,000, while median incomes in the wealthiest Houston neighborhoods reach as high as $97,170.
As the table above shows, Tesla's placement of its American stores and galleries is no accident. They are located in some of America's wealthiest cities, and the majority of the states that Tesla is located in are in the upper half of median annual household income. The cars that Tesla is selling today are not mass-market automobiles meant to redefine the way Americans drive. Rather, they are status symbols for the wealthy, similar to Tiffany's (TIF) jewelry, or a Louis Vuitton (LVMUY.PK) purse. Tesla's international stores and galleries tell the same story. The company has stores located in cities such as Zurich, Geneva, Milan, Hong Kong, Tokyo and Copenhagen, all cities with a sizeable population of affluent consumers.
Earnings Estimates And Financials
There is a great deal of debate amongst sell-side analysts as to whether or not 2013 will be the year that Tesla reaches profitability. While the consensus estimate for Tesla, based on data from Zacks, calls for the company to post a loss of 28 cents per share in 2013, there is a wide range of forecasts underpinning that consensus estimate, with estimates ranging from a loss of $1.57 per share to a profit of $1.16 per share. However, there is an agreement that Tesla will be profitable in 2014, with earnings of $1.88 per share. And 2015 earnings are estimated to grow by 55.85% to $2.93 per share. Based on Tesla's January 7, 2013, closing price of $34.34, this equates to a P/E ratio of 18.27x 2014 earnings, and 11.72x 2015 earnings, hardly levels that we deem to be unreasonable.
Critics of Tesla point to the company's working capital deficit as evidence that Tesla does not have a sustainable business model. However, it is important to understand the composition of Tesla's current assets and current liabilities. Tesla ended Q3 2012 with $284.451 million in current assets, of which $85.693 million was in the form of cash and investments. And $138.338 million of Tesla's current liabilities are in the form of reservation payments, which are technically refundable (hence the requirement that they be listed as current liabilities). However, given the demand for the Model S, as well as the Model X (which customers can already reserve), it is unlikely that customers will demand their reservation payments back en masse. And with CEO Elon Musk announcing on December 3 that Tesla was cash flow positive the week before, we expect Tesla's financial strength to gradually improve as Model S deliveries accelerate.
Conclusions
In our view, Tesla should not be seen (at least at this point in time) as a revolutionary company whose products will change the world overnight. While electric vehicles are becoming increasingly prevalent in both the United States and across the world, they are still a niche market at the present (according to the Electric Drive Transport Association, all electric cars, including hybrids, hold 3.33% of the American auto market). With Tesla currently sitting around 14% below its 52-week high of $39.95, we believe that adding to or initiating positions in Tesla is a good decision, and we have been adding to our stake in Tesla over the past several trading days. As Tesla expands both here in the Untied States, as well as Europe and Asia, more affluent consumers will be able to see a Tesla firsthand, and discover the cachet and quality of a Tesla automobile. Tesla should be seen for what it is today, not what it might be years from now. What Tesla is today is a luxury company selling a product that wealthy consumers have repeatedly shown they are willing to pay a premium for.
