Last week's spike in Tesla Motors (TSLA) was a market dislocation consistent with a short-term supply and demand imbalance in the stock. Margin calls and the race to exit short positions in Tesla created a disproportionate number of buyers relative to sellers, sending the stock irrationally high. As a result, the stock has become uncoupled from its intrinsic value, a situation that should correct itself this week as cooler heads prevail.
Industry comps (see below) show that to even come close to justifying its current valuation, Tesla must achieve near perfect execution over the next two years in a favorable macro environment. Currently Tesla trades at $433,000 per car they sell, despite the fact that they only make ~$15,000 per car in gross margin. Even if they ramp production 5x to 100,000 cars by 2015, they will still be trading at $91,000 per car they sell (compared to the current industry median of $22,000). Assuming Tesla reaches an industry median 9% EBITDA margins (something that has taken other car companies many years of learning), in two years the company will still be trading at 11x EBITDA. The company is currently trading at 4.7x 2013 projected sales vs. an industry median of .9x. These valuations could be justified if the company had a scalable technology platform with 70-80% gross margins, but not on a 17% gross margin manufacturing company.
Based on price range, size, and performance, the closest equivalents to Tesla's primary product, the Model S, are the BMW 7 Series and the Porsche Panamera. Last year, the BMW 7 Series sold 60,000 units and the Porsche Panamera sold around 30,000 units. This was largely achieved through an extensive dealer network, something Tesla lacks entirely. Tesla currently can only produce ~20,000 units a year under current capacity. Increased capacity will likely require an additional secondary offering to fund CapEx since the company is not generating significant cash and only has ~200mm in cash on the balance sheet (of which ~130mm are customer deposits). Finally, it is important to keep in mind the simple fact that because of its range limitations, the Model S cannot be a primary vehicle, but will always be a second or third vehicle for a multi-car household. Thus even if you consider an optimistic number of 100,000 units per year, Tesla's valuation is still off the charts.
It is also important to understand Tesla's competitive positioning. Currently the company's production is a mere rounding error to any other major car company. Despite the hype, Tesla did not invent the electric car and does not even have a significant market share within the segment. Toyota (TM), Honda (HMC), General Motors (GM) and Ford (F) have built millions of electric and hybrid vehicles. While Tesla has opened up a new segment, the luxury/performance electric car, to classify it as the industry leader or sole pioneer in electric cars is a stretch. It would take a patent expert to do the analysis, but if you compare Tesla's $200mm a year in R&D to any of the major auto manufacturers' multi-billion dollar research investments it is likely Tesla has no real advantage here. As has been observed in many industries, the incumbent players have let Tesla spend hundreds of millions on a proof of concept and will likely step in to compete with far superior scale and cross platform knowledge.
In the short term Tesla should settle back to the low $60s above its 10 and 20 day moving averages:
Over the longer term, here are the catalysts that could significantly shift the stock price:
- Company announces increase in sales/backlog
- Tesla announces a new and/or cheaper car model
- Company forms sales agreement with another car dealer network
- Short capitulation/squeeze higher
- Ford, GM, Toyota, or another major car company launches a competing product
- Quality issues arise with the Model S, in particular degradation of battery life would significantly damage the brand
- Initial order boom fades, they have been pushing for buyers to move orders forward
- Energy department signals phase out of electric vehicle tax credits which will increase vehicle costs to consumers by 10-15%
- Analyst downgrades or large investment fund comments on fundamentals
- Company launches a secondary offering at a lower price and dilutes ownership
- Insiders stock sales, which have been low up to this point
For the record, the author has test driven the Model S.