(Editor's Note: Several of the calculations herein have been corrected. Thank you for your understanding.)
There seem to be many misconceptions about the Tesla (TSLA) Model S, the first electric car to be named Motor Trend Car of the Year, and the only car to ever receive the award by unanimous decision. The main mistake that seems to pop up a lot is the assumption that the Model S is a toy for the one percenters. Although the Model S is a premium sedan with a high dollar sticker price, this is not at all the case. I'm writing this article as a follow-up to my last article, Tesla Motors: A Perfect Hedge, to show why the Model S, if financed, is affordable for anyone who can afford a new mid range luxury car.
The Model S starts out at $52,400, and goes up to around $100,000 for the fully loaded performance edition. For the purpose of this article, I will assume that the average price is about $75,000. The Model S is priced to be competitive against a similarly priced car; such as the BMW M3 series. However, when looking at the total cost of ownership, the Model S costs significantly less, and many have suggested offers tremendously more.
"The Model S is faster than a BMW M5, has a longer range than any other pure electric car, and looks like the future" (Jalopnik)
Gas is expensive
In 2011, Americans on average spent $4,000 for $3.51 a gallon gasoline. If you assume $4.50 for premium fuel (since a comparable ICE car would not be running on regular), that number easily rises to $5,000. In my area of the United States, the price for premium is currently around $4.50. Assuming an average Premium Sedan will be used for 8 years, is driven 20,000 miles per year, and gets 25 miles to the gallon, the amount spent on gas over the life of an ICE car easily reaches $28,800. If we assume that by 2016, the price of Premium will average about $5.5 a gallon in the USA, the savings would be closer to $35,200.
No Sales Tax on Electric Cars
Depending on what state you live in, the Model S may not be subject to sales tax. Assuming a 6.5% sales tax (varies by state), that's a savings of $4,875 off a $75,000 Model S from the sales price. Additionally, the Model S receives a $7,500 federal tax credit. If we add this up, we can reasonably say that the Model S, when compared to an ICE car, cost $12,375 less than a comparably priced car ($7,500 + $4,875 = $12,375)
Lower Service and Maintenance Costs
Owners of the BMW M3, according to users of the BMW owner forum, Bimmerfest, spend at least $1,000 annually on service and maintenance. In contrast, Tesla Motors offers a four-year service and maintenance plan that includes unlimited house calls from Tesla's "rangers" (service team) for $2,400, with the option of extending it another four years for an additional $2,400.
8 years x $1,000 = $8,000
$8,000 - $4,800 = $3,200
Using these approximations, and assuming $4.50 a gallon gas we can reasonably say that the Total Cost of Ownership for a Model S is at least ($28,800 + $12,375 + $3,200 = $44,375) less than a comparably priced ICE car, and $47,575 less if we assume gas is $5.5 a gallon.
Electric Car + Solar Panels = Even more of a bargain - The Car pays for itself
If a Model S owner decides to equip their home with Solar Panels, say through a solar leasing company such as SolarCity (SCTY) or SunPower (SPWR), the savings will only continue to add up. Solar panels, in many cases, will save a home owner $50-150 a month on their total electric bill. This adds up to $600-1800 per year. If an EV owner equips their home with Solar panels, and the panels provides most or all of their electricity needs, they are practically getting the electricity for their car for free. Furthermore, a Model S owner who installs solar panels and saves $1,000 per year from using solar, will over 8 years save around ($28,800 + $8,000) = 36,800 by not buying gas, and powers the car at virtually no cost.
Although the cost of Model S is well above that of an average mid range sedan, the long-term cost of ownership is not that different. The numbers suggest that a $75,000 Model S has a total ownership cost that is roughly half of a comparably priced ICE car.
As addition, you get "feel good" benefits. Tesla Motors is creating American jobs, assembling the Model S in California, and raising the bar for automobile and clean energy standards. If you want to buy an American made car, and have the option to decide between buying a mid range ($20,000-$40,000) General Motors (GM) or Ford (F) ICE car, that competes with ($20,000-$40,000) cars or a $70,000 Model S, that is superior to many ($70,000-100,000) cars (i.e. the Dodge Viper), which would you buy? The answer is obvious. The Model S is one of the safest, fastest, most attractive, competitively priced vehicles in the world, is powered by clean energy that will cost a lot less than gasoline, and is good for the environment. It is beyond me how anyone in the market for a new mid to high end sedan could overlook the amazing value the Model S carries.
When you account for the $44,375 in savings for a $75,000 Model S, and add $15,000 from trade in value after eight years, a $75,000 Model S is practically the same price as a $15,000 sedan. $75,000 - ($44,375 + $15,000) = $15,625 = (Real Cost of a $75,000 Model S when compared to an ICE car that gets 25MPG and is using $4.50 gas).
It should come as no surprise that Tesla CEO, Elon Musk, is very confident that Tesla will beat its guidance of 20,000 deliveries in 2013. After all, he's practically giving away the world's best car for free. Last night, Tesla announced that it is now producing 500 Model S's per week (implying at least 25,000 annually). I am very confident Tesla will surpass its conservative guidance of 20,000 deliveries in 2013. If Tesla can manage this, I suspect my near-term target from my article, Tesla Motors, a Perfect Hedge of $70 could be too low.
If Tesla delivers 25,000 Model S's, with an ASP of $75,000, and achieves 25 percent gross margins, they will net $468,750,000. If we add $250,000,000 from ZEV credits (Assuming $10,000 per Model S), and $100,000,000 from the sale of power trains, Tesla will net $818,750,000. If expenses in 2013 remain the same as in 2012, at $400 million annually, Tesla will earn $418,750,000. With a P/E of 40, that becomes a market cap of $16,750,000,000, implying 400% upside potential, and a possible price target of $144.
Disclosure: I am long TSLA, SCTY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.