Short Tesla Motors: Valuation Is Unsustainable, Premium To Peers Is Unjustified

| About: Tesla Motors (TSLA)

In this article, I will compare Tesla Motors (NASDAQ:TSLA) to Porsche AG (OTCPK:POAHY) to show why Tesla's shares are extremely overvalued. Both companies are upmarket luxury brands but Porsche has a proven record of accomplishment whilst Tesla is a new contender. Both sell cars in a similar price range.

Let us start with some simple math. We know that:

  • Tesla anticipates sales of 40,000 in 2014 (source: Tesla 2013 AGM)
  • Tesla's target operating margin is 25% (source: Tesla 2013 AGM)
  • Model S's price range is from $63,570 to about $113,000 (source: The price is likely to be higher outside the US due to shipping costs and import duties but that makes no major difference to company earnings.

For the sake of example, let's be generous and assume Tesla is successful in meeting its sales and operating margin targets in 2014 and their average vehicle is sold for $90,000.

  • That gives us 40,000 x $90,000 = $3.6 billion in revenue
  • Using a 25% margin that would imply $900 million in operating income
  • Tesla's current market capitalisation is $22.4 billion (source: Bloomberg).
  • $22.4bn/$900m = 24.88, that is Tesla's multiple of operating income to its market capitalisation.

Now let's compare that number to Porsche. Porsche's price over earnings ratio is just 2.5 times (source Reuters) based on 2013 estimates. Note that Porsche's operating income multiple would be even lower.

  • 24.88/2.5=9.952

Which means that Tesla is at least 9.5 times more expensive than Porsche.

Bear in mind that Porsche sold 143,096 units in 2012 and is expected to increase that number in 2013 whilst Tesla is projected to sell just 25,000 units by the year end (source: Porsche 2012 annual report) and 40,000 in 2014.

Do not forget that Tesla is GAAP unprofitable, and is expecting to break even by the end of the year whilst Porsche has already made $3.3bn of net income in 2012 (source: Porsche 2012 annual report) and will likely exceed that in 2013.

To me Tesla's valuation just does not make any sense, and I believe Tesla's share price should inevitably collapse.

Apart from the valuation premium to Porsche there are also a lot of other factors which make me skeptical about Tesla's share price ($185.83 at the time of writing).

Tesla will imminently face a capital shortage. The company continues to burn through cash with aggressive R&D, Sales and Administrative spending totaling $424 million in 2012 (page 64 of SEC form 10-K for 2012), a number which likely to increase according to guidance given by the CEO during the Q3 numbers Q&A call. Given such high level of spending Tesla would rely heavily on borrowing and stock offerings for future financing which would result in shareholder dilution and a higher debt burden.

To tackle a problem of long-range usability Tesla aims to build a "Supercharger" station network across the country. Can you imagine other car producers building petrol stations to sell fuel for free? Even if you assume the price of electricity is negligible, there are staffing and maintenance costs on top of the cost of the stations themselves. Tesla claims they have factored that into the price of the car, but how many utilities companies do you know that have wired grids and laid pipes to consumers successfully without government subsidies?

Tesla's production capacity is significantly limited. Currently Tesla's factory can produce about 40,000 units per year (source: Tesla 2013 AGM webcast). However, production is constrained by parts suppliers' capacities. A key constrained component is the battery cell. The battery industry is already operating at close to full capacity due to the EV bump in the recent years and in order to achieve a production target of 40,000 units per year Tesla must convince its suppliers to invest in extra capacity - which is time and capital intensive. It would be a big commitment for Panasonic (Tesla's main battery supplier) given Fisker's history. Even if successful, it would take at least a year, so Tesla will be supply constrained in 2014-2015.

Tesla is not a zero emission vehicle. It is a hoax. Which is easy to see once you do the math for the top of the line 85kw Model S. Let's take the average CO2 emissions per kw in the US (source: US environmental protection agency web site), we adjust it for 7% grid loss and 10% battery inefficiency (you actually need about 93.5 kw of electricity to charge a 85 kw battery). Factor all that into account and we arrive at 192 g of CO2 per km for Model S against 169 g of CO2 per km for Porsche Panamera Diesel (which is a the similar price bracket). This is a conservative estimate. Should one also factor in a much more energy intensive production process (compared to conventional internal combustion cars) and the energy required to recycle aluminum battery blocks, one would arrive at a number well over 500 g of CO2 per km - which is a big SUV territory. To counter that argument Tesla claims they are looking to generate power from sustainable energy sources but are unable to give any clear forecasts. The "Supercharger" stations utilizing solar panels will only compensate for a fraction of that energy whilst doubling the cost of the stations themselves (from $150K to $300K per station). In my opinion that is financial suicide and nothing more than a marketing stunt.

The rollout period for Tesla's affordable vehicle is 1.5 years whilst competitors are already selling their versions (Nissan Leaf, BMW i3). Until then, Tesla's target consumer audience will be severely restricted by the high price tag. And do not forget that according to Mr Musk, new affordable cars will be sold at a lower margin, which means one cannot expect Model S's profitability levels - i.e., goodbye 25% margin.

Finally a bit of anecdotal evidence: Tesla's Technology is perceived as innovative, well here is an example from Wikipedia: the first ever land speed record was set in 1898 by an electric car.

Now that you can see that current share price is unsustainable you can profit by going short Tesla shares.

Disclosure: I am short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.