Will Tesla Motors Need A Second Factory?

Jun.25.13 | About: Tesla Motors (TSLA)

In 2013, Tesla (NASDAQ:TSLA) will sell approximately 21,000 vehicles. I believe Tesla's ultimate objective is to meet or surpass the global vehicle sales of BMW. For Tesla, to achieve (in the long term) the 1.8 million annual global vehicle sales BMW achieved in 2012, Tesla will need another factory. Although Tesla's current capacity in Fremont is far above current projected sales of 21,000 cars per year, it is not inconceivable that sales will increase to beyond capacity in the long term, and an additional factory will be needed.

Why could demand jump?

Tesla has been producing amazing vehicles and is likely to continue to do so. At the same time, the net total cost to the consumer for a third generation Tesla will be far below the cost to buy any competitor's comparable vehicle. Tesla has announced the third generation Tesla vehicles which will have around a 240 mile range, will be sold for $30,000 net of the Federal tax credit. In many states, the car will be bought without the additional cost of sales tax and with the benefit of a state tax credit, and the electricity to power the car will cost a lot less than gasoline and, may even be available without charge.

The target competition for the Tesla Generation 3 sedan is Audi's A4 and the BMW 3 series (Digital Trends).

The Audi A4 and the BMW 3 each has a base price of around $30,000, plus sales tax, and without any tax credit. If the third generation Tesla vehicles will be priced and built to compete with the BMW 3 series, and will offer the build quality and design that was included in the Model S, I have no doubts TSLA will eventually exceed the approximately 400,000 annual global sales of the BMW 3 series, barring any production or supply constraints, and will eventually meet or surpass the 1.8 million new vehicles BMW sold in 2012, approximately two percent of the global new vehicle market. These sales will be at the expense of all the auto makers.

Tesla Will Expand offerings

Tesla Motors vehicles have earned a reputation for very attractive vehicles that are better the offerings of the big conventional auto makers. Consumers are not stupid, will take notice, and many will choose to buy their new car from Tesla instead of the conventional big auto makers. GM (NYSE:GM), Ford (NYSE:F), Chrysler, Audi, BMW and the other big auto makers sell around 82 million cars per year worldwide. In 2012, Ford sold 5.69 million vehicles worldwide, GM sold 9.2 million vehicles worldwide, Toyota (NYSE:TM) sold 9.25 million vehicles worldwide, Audi sold 1.45 million vehicles worldwide, and Chrysler sold 2.2 million vehicles in 2012. If Tesla can take five percent of Ford, GM, Toyota, Chrysler, and BMW's market share, using 2012 figures, Tesla will sell 1.27 million vehicles

After Tesla expands its offerings to accommodate the range of different types of vehicles s new car buyers demand, as Elon Musk has stated he intends to, I believe Tesla will have no problem achieving annual global demand for at least 1.8 million vehicles. Once Tesla's sales gain meaningful traction, it is unlikely the trend will reverse course. After consumers become acclimated to the quality of the Tesla brand and how to recharge the vehicle, and the overall personal and societal benefits of driving an electric car instead of an internal combustion engine vehicle, the upward trend in electric vehicles is likely to accelerate.

Tesla plans to offer variants of the Model S platform and the Third Generation platform. I suspect by the second or third year of production, Tesla will see combined demand for each variants of the third generation Tesla equal or surpass peak demand for the Toyota Prius (~400,000 units in 2010), which by then may be perceived by then as stale technology that is passing into obsolescence.

Tesla is already taking market share from Mercedes, BMW, and Audi

In the first quarter of 2013, Tesla's Model S accounted for about 10 percent of "luxury sedans" sold in the United States, and took market share from established players such as Mercedes, BMW, and Audi.

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You know the Tesla Model S, the $70,000 (and-up) electric car that "nobody can afford"? Well, evidently, more than a few people can afford it. (CNN)

A $30,000 Tesla that is accessible to anyone in the world who can afford a new car, will offer performance superior to Tesla's competitors, and will have the added "cool factor" of being a Tesla. Projecting that Tesla will ultimately achieve two percent of global auto sales is not unrealistic, and may ultimately be an understatement of Tesla's true potential. In 2008, Microsoft (NASDAQ:MSFT) CEO Steve Balmer scoffed at the idea of Apple (NASDAQ:AAPL) achieving "meaningful" market share. As of Q1 2013, Apple has commanded approximately 18 percent of the global smartphone market, up from zero percent in 2008. Although I doubt Tesla could obtain 18 percent market share, I am very confident that two percent market share is achievable.


If Tesla can command two percent of global auto sales, sell 1.8 million vehicles with an average sales price of $40,000, and achieve the gross margins of 25 percent predicted by Elon Musk , Tesla will earn $18 billion in profit. If we apply a PE of 10, Tesla could be worth $180 billion, almost 1800 percent above today's current price. The main factors preventing Tesla from achieving this many unit sales are supply constraints, the limitations of Tesla's current factory, and Tesla's desire to achieve 25 percent gross margins. I do not expect Tesla will see demand of 1 million units until close to 2020, but I do expect it will happen. Tesla has confirmed that demand for the Model S is growing exponentially, with two to three additional orders resulting from each car delivered due to word of mouth advertising by the buyers. I expect initial demand for the Third Generation Tesla to be between 200,000 and 300,000 units, and to follow the trend of Model S demand and grow exponentially for a few years. Tesla has announced a desire to build a second factory in Texas, and I think Tesla anticipates needing it. I suspect Tesla is unofficially expecting demand for Tesla vehicles to exceed the capabilities of the Tesla Factory by 2018, and to exceed 1 million units by 2020. This would give Tesla plenty of time to build a new factory, and prepare the its service centers and super charge network for this kind of demand.

I expect demand for a $30,000 Tesla to take the world by storm. Investors are currently projecting demand for the third generation Tesla will peak at 200,000-300,000 units, an outcome that I feel is far too conservative. As I mentioned in my article, Tesla Motors' Amazing Future Earnings Potential, valuing Tesla requires projecting where demand for Tesla's vehicles will be in 8-10 years. Even if demand for Tesla vehicles peaks at half of BMWs global sales, Tesla's stock is incredibly undervalued at the current price.

Disclosure: I am long 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.