Tesla's Valuation After A 12.7% Sales Decrease And Uncertain Internet Sales Model

| About: Tesla Motors (TSLA)

There are three things that can bring the Tesla (NASDAQ:TSLA) short squeeze to an end. If sales continue to slowdown, if Tesla is forced to go through a dealer network and if the expansion into China fails. According to this Investors.com article, Tesla had a 12.7% sales decrease in May (not including sales in Europe, which Tesla has not wanted to publish), which may confirm a lot of theories that after an initial sales boom from the enthusiasts sales will quickly slow. Tesla is also currently involved in a battle with the dealer network, which will drain resources and ultimately may cost a lot in profit margin. According to this Forbes.com article, several states are close to banning internet sales of Tesla cars in their state. It seems like the Republican controlled states are more pro dealerships and liberal states like New York, which shot down a challenge to Tesla's sales model, sides with Tesla. So after possible millions in litigation and lobbying costs, Tesla may lose all of the Republican states, so about half of the country will either not buy Tesla or Tesla will have to sell in those states at a greatly reduced profit margin. Lastly, the venture into China will be costly and might fail. The current administration in China has shown they are against luxury items and according to this Chinadaily.com article, they may tax luxury cars up to 20%. Thus with the high taxes and an influx of auto companies trying to sell into the Chinese market, this endeavor may yield very small orders compared to the price to set up operations in that region.

With the possibility of these events coming true, they should be priced into the valuation model for a realistic look at what the stock could be worth. The slow down in domestic sales will most likely continue (given the dip in May sales and the Fed reducing quantitative easing) as well as a slow down in the European market, as Europe is still in a recession. Given these two predictions, Tesla's forecast should be cut back by roughly 10% for 2014. Thus we can say 25-32k cars shipped in 2014. In this model we will keep the net profit margin at a very high 4.8%, but given the government credits ending and having to possibly go through dealers in the future, that margin should decrease. Here are industry net profit margin rates from Yahoo.com and Tesla is currently at 2%. If they get their operating margins to their lofty 25% goal, they can be in the 4.5-5% rate, but there are a lot of "what ifs" included with that goal, including keeping battery prices low and keeping bookings high to be able to continue to purchase in bulk for deeper discounts. But in the 2015 model, when the dealerships will most likely get their way in a lot of the states, the United States market will see much lower margins and will bring down the overall net profit margins most likely down to 3-4%. Lastly the Chinese market will be built into the model as another factor that backs up the 10% sales decline year over year and a reduction in margins due to high operating costs.

Putting these factors into the model we arrive at the following EPS models:

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A couple of key takeaways from these models is that the share increase might push the float over 150 Million outstanding shares due to further R&D on the Gen III (which will take a lot to get down below 40k sale price), further penetration into the Asian markets, supercharger network and litigation costs against the dealer network in most of the states in the United States. Another take away is that once sales start to decline quarter over quarter the market and the big investment banks will not pay a high P/E for the stock, but rather the typical P/E of 25 or lower for this industry. Thus a fair price according to these models would be $25-50 per share after sales stop growing more than 30% year over year and the margins fall.

In conclusion, the recent short squeeze by enthusiasts and professional traders will likely come to an end after Tesla will most likely lose money in the upcoming quarter (per share) as well as report lower booking demand in North America. The pressure of growing into new markets, developing a more affordable car and fighting the American dealerships will most likely drive down margins and coupled with slower car sales, will bring the stock back down to reality. This can currently be seen with the articles mentioned at the top as well as the lower volume that is being traded every day. Thus as the hype machine leaves and the volume keeps declining, investors should pay close attention to what this stock is really worth.

Disclosure: I am short TSLA. 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.