The Mother Of All Tesla Articles: A Complete Examination Of Tesla

Nov. 1.13 | About: Tesla Motors (TSLA)

So far I have written several articles on Tesla (NASDAQ:TSLA) each examining a different facet of the bear case and providing a rebuttal for the bull case. I have also attempted to value Tesla under various scenarios. My analysis has received everything from praise to criticism. I have received around 1000 comments and been called everything from thoughtful and patient to idiotic and lacking math skills.

I will begin with general expectations for this quarter, then go on to discuss all the risks for Tesla that people have pointed, take a look at production and sales numbers under various circumstances and then finally get to earnings and attempt to predict the stock price in several scenarios.

Expectations for This Quarter

The general consensus for Tesla Model S sales for the Sep. quarter is 5600 - 6500 cars. The previous quarter Tesla sold 5150 cars. Tesla has said that it will deliver 21,000 cars this year. It is widely believed that this will be the low end. I did some analysis in a previous article that pointed to the possibility that Tesla may have produced more than 8000 cars in the Sep. quarter. I did not account for loaners, demo cars and cars in transit to Europe. If those account for a quarter of my estimate, Tesla will have delivered more than 6000 cars, making it in the higher end of the 5600-6500 cars.

As for revenue, analyst expectations for this quarter are: $503M (Low: $358M, High: $610M)

Analyst EPS expectations for this quarter is: $0.10 (Low: -$0.10, High $0.29)

Amateur expectations are on the middle to high end. See discussion here. Also if I were to guess the analyst expectations are a mixed bag of GAAP and non-GAAP earnings. It is unlikely that Tesla has non-GAAP revenues of $358million (even at 5000 cars, non-GAAP revenues should be more than $450 million). For GAAP revenues of $610 million, Tesla would have to sell more than 8000 cars, which is way higher than any estimates (except mine).

Risks for Tesla Going Forward

The purpose of this section to analyze risks specific to Tesla so I will ignore general stock market risks like global recession.

  1. Inability to achieve target gross margin of 25% - Unlike other manufacturers, Tesla sells directly to the consumer. It operates a few stores mostly for the purpose of demonstrations, test drives etc. Cars are custom built to order and delivered to the customer. There is no inventory for sale at the stores. Cutting out the middle-man and not having inventory are positives for Tesla gross margins. Currently with the low volume luxury Model S and upcoming Model X, it is likely that Tesla will hit their target gross margins. However for the mass market car that Tesla plans to make, this might not happen. Tesla also sells free supercharging for life as an option with the car. Tesla currently charges $2000 for the privilege and that might not be enough to cover costs of the superchargers if the lower end model is successful and comes with the option, further reducing margins.

  2. Unknown future problems with the cars that causes recalls - It is unknown what a recall would cost Tesla if it needs to do one. Tesla has the advantage over other cars here that it has software upgradeable via home wi-fi and also that the major components of the car are less complex than those of gas cars and in theory need minimal to no maintenance.

  3. Further delay in the Model X - The Model X delivery in volume has been delayed to 2015, from 2014. Further delays might slow down the growth of the company.

  4. Significant delay in the Model E - The Model E, expected to be a smaller BMW 3 sedan sized car but still with a 200+ mile range is expected to launch in 3-4 years (2016 - 2017). However I find that target optimistic, especially for real volume production, and expect it to launch in volume in 2018. If it is delayed further than 2018, other manufacturer's incremental upgrades might catch up with Tesla in electric range.

  5. Inability to reach the given price target of Model E - Tesla has said that its price target is $35,000 before rebates. That might not be a realistic target. Personally, I'm betting on the car costing at least $45,000 before rebate decently equipped. If that is not possible sales expectations may need to be adjusted downwards.

  6. Inability to find enough battery suppliers for Model E ramp up - Panasonic can supply all of Tesla's needs for the Model S/X (see news below). Tesla is in talks with Samsung to supply more batteries but by the time the Model E launches in high volume, Tesla will need the entire world's battery supply in the 18650 form factor. This could potentially delay a ramp up in production as suppliers gear up to meet demand.

  7. Inability to ramp production as fast as expected - Tesla has demonstrated that they can ramp production by 20,000 cars a year but once they have multiple models each needing to ramp up by that much or more every year, there is the possibility of delays both internal and external to Tesla.

  8. Significant Competition for the Model E when it arrives - There is a remote possibility that when the Model E arrives, manufacturers have upped their game. Such as a Cadillac CTS with Volt technology and 80 mile electric range or a BMW i3 successor with double the range and a larger size. This is not a risk I am concerned about but it has been pointed out in both articles and in comments on my articles. Based on the current status of the Electric car industry with small low range city driving cars such as the leaf and the i3 and overpriced tiny cars such as the Cadillac ELR, I don't expect any competition at least until 2020.

  9. Market Saturation of Model S / X - Tesla is selling all the Model S cars that it can produce but that might not be the case. Nobody knows what the worldwide saturation point is for an expensive luxury vehicle like the Model S. If we go by North American standards and compare to its closest competitor - the Porsche Panamera, the Model S outsells it 4:1. That might not necessarily be true worldwide.

  10. Fuel price collapse or other concerns causing disinterest in Electric Vehicles - As American production grows, fuel prices might drop or stabilize at a low point making people unwilling to pay a premium for electric cars. This might not be an issue for Tesla if they can achieve their price point for the Model E. In that case no matter what fuel prices are, the Model E will still be cheaper to operate than its competition

Production and Sales Going Forward

I wrote one article before with "Less Optimistic" sales projections. In this one I will take Pessimistic, Expected and Optimistic Scenarios and take a look visually.

Let's look at a really pessimistic scenario first. Assuming everything goes wrong and Tesla remains a small niche player. Note that I am still ignoring the worst case that Tesla ceases to exist. In this scenario, I'm assuming Tesla would only sell a maximum of 22,000 of each luxury Model (S/X) and sell only a maximum of 44,000 of the Model E. Also I assume Tesla is unable or unwilling to ramp up beyond 20,000 per model per year because either they cannot or there is just no demand.

Next let's look at what is possible. This is based on the overly optimistic analysis by a Wedbush analyst who predicted 100000-150000 Gen 3 sales in 2017 expanding to 300,000/year longer term. I'm in agreement of the 300,000 longer term goal but I'm not at all sure that the 100,000 - 150,000 can be achieved by 2017. Not because of a lack of market but because it is difficult to believe that that kind of production can be achieved at that price point so soon.

Next let's look at what I expect. This is approximately a reasonable middle ground between the two scenarios above, where Tesla will sell about 80,000 of the Model S and X combined at saturation and the Model E will launch in 2017, with ramp up at about 50,000 additional cars per year going forward.

Revenues and Earnings Going Forward

This is where the analysis gets tricky. The three scenarios above took me down 9 paths assuming low to high revenues and earnings in each case. I will look at some here and attempt to plot them.

For the low end I will assume revenues of $80,000 per Model S/X and $40,000 for the Model E. For the middle, I will assume $90,000 for the Model S, $95,000 for the Model X and $45,000 for the Model E. For the high end I will assume $95,000 for the Model S, $100,000 for the Model X and $50,000 for the Model E. In all cases I will ignore additional revenue from powertrains for other manufacturers and ZEV credits.

As for net earnings, I will assume a low end of 3% net margin and a middle of 10% net margins and on the high end I will assume that margins will grow from 10% to 15% net margin over the 5 years.

I will assume the float will grow from 145 million shares in 2014 to 176 million in 2018. Using those scenarios, EPS would be:

Predicting share prices is something entirely speculative as compared to these other numbers above but assuming that in the niche very pessimistic scenario P/E would be 20 and drop to 10. This would be my gloom and doom scenario. In the middle scenario I take a P/E of 75 in 2014, dropping down to 55 in 2018. In the optimistic scenario I take a P/E of 100 dropping down to 80 in 2018. Remember, in 2018, Tesla will still be growing very fast. At that point it is expected that the Model S, X and E are available and new models are around the horizon.

My personal expectation is somewhere between the middle and the optimistic scenario. In the middle scenario, average annual returns are about 25%.

News and Other Events

Tesla has been in the news a lot lately. Most of it positive.

Accidents: There have been two high profile accidents involving Model Ss. In one a Tesla caught fire after a collision with road debris. The car warned the driver to pull over and exit. The fire was contained to the front of the car. In the second accident, the drivers were speeding fast enough that a collision caused severe damage to the car which eventually caught fire. But the passengers survived. In both cases the Tesla proved that it is a very safe car. There was also a head on collision with another car in which the other car was obliterated and both passengers died while the Tesla driver survived with a few scratches.

New Executive: Tesla hired Apple (NASDAQ:AAPL) VP Doug Field to lead vehicle programs.

Supercharger Updates: Tesla supercharger expansion seems to be on track. On the West Coast supercharger option enabled Tesla's can go from San Diego to Vancouver just using Superchargers. Tesla also is aggressively working on a similar east coast corridor.

Supplier Updates: Panasonic (OTCPK:PCRFF) and Tesla inked a deal for a supply of about 2 billion cells over the next four years. If Tesla adds any other battery suppliers in addition to Panasonic, it can double sales annually. Tesla is in advanced talks with Samsung (OTC:SSNLF) for additional cells rumored to be for the Gen III. If Tesla uses Panasonic cells for only the Model S/X then the production can easily grow to 100,000 cars/year.

Other News: Mercedes wants to expand its powertrain supply arrangement with Tesla to outcompete BMW.

Conclusion

In Conclusion, I am positive on Tesla and own the stock. I will buy more on dips to 100, which might happen any time Tesla misses on expectations. I will sell a quarter of my holdings to lock in gains at about $200.

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. I plan on buying more TSLA if it falls to $100 and sell a quarter of my holdings at $200.