As we approach year-end, a sure contender for the "Stock of The Year" award is Tesla Motors (TSLA). TSLA began 2013 as a real underdog story, and is a company that is no stranger to being target practice for short sellers.
A lot has happened since then, and Tesla is currently the darling of the automotive industry, sporting a far loftier multiple than perhaps any automaker in history, with a far more generous valuation than the many legacy competitors it faces. At one point, TSLA was up over 400% YTD, and one can only imagine how dearly (unhedged) the short sellers paid for their bearish bet.
Tesla peaked in late September at $194 per share, and has since corrected approximately 28%, and trades at ~$140 per share.
For purposes of this article, I will focus on the U.S. auto market primarily. The reason being that in my opinion, global trends are far harder to predict, and the U.S. can act as a good barometer for the global auto industry. If you would like to see the full statistics on the global auto market, click here for a report done OICA.
Below, see the players in the U.S. auto market by unit sales. As it currently stands, Tesla is the 18th largest automaker in the U.S.
U.S. Auto Sales
2013 Sales Year To Date
Market Cap (Millions of USD)
Price to Earnings Ratio
Ford Motor Company
Chrysler (Owned by Fiat)
Subaru (Owned By Fuji Heavy Industries)
Jaguar Land Rover (Owned by Tata Motors)
Porsche (Owned by VLKAY)
Maserati (Owned by Fiat)
Ferrari (Owned by Fiat)
Source: Wall Street Journal
Tesla controls a very small sliver of the auto market in the U.S.; approximately 0.13%, yet commands a market capitalization of approximately $15B. That is more than where Chrysler is expected to price in its coming IPO, and Chrysler sells nearly 100 times more cars than Tesla does.
To put this into a little bit of perspective, General Motors has approximately $22,000 in market cap per new vehicle sold annually; Tesla has over $1M. In other words, the market is giving Tesla over one million dollars of valuation for each vehicle it sells.
Revenue and Growth Drivers
By 2015, Tesla expects to be selling approximately 43k Model S units per year, as well as another 40k units made up of both the Model X and Generation 3 model, for a total of approximately 83k units. Bullish analysts, including Morgan Stanley's Adam Jonas, expect a growth rate of upwards of 60% until FY 2017, at which point revenue growth will "slow" to around 29% into 2020. In other words, Tesla bulls claim the company is fixed for explosive growth not just in the near future, but for the coming decade as well.
Analysts expect approximately 12-13% of total revenue spent on R&D for the next three years, at which point it drops to ~6%.
Those seasoned investors know well that sell side analysts are rarely able to predict, with any semblance of precision, anything more than five years in the future. There are too many moving pieces; the world is constantly changing in ways we cannot possibly foresee.
The Balance Sheet
By the end of FY 2013, TSLA is expected to have approximately $2.4B in assets and $1.8B in total liabilities, of which $900M or so is long term. Tesla has an accumulated deficit of Additional Paid in Capital (Equity) of over $1.1B. What this basically means is that the company made far more from issuing stock than it thought it would have (surprise).
Free Cash Flow
Unlevered FCF is expected to be negative for FY 2013, and then reach $320M in FY2014. After that, Morgan Stanley analyst Adam Jonas expects $760M in FCF in 2015, and over $2B by 2021. He also projects margins are to expand to about 15% by 2020. The following chart depicts the liquidity profile Mr. Jonas expects TSLA to follow.
As Tesla is expected to continue to earn market share, analysts expect approximately 50% growth, YoY of total unit sales through 2017, reaching approximately 130,000 units sold.
I am of the opinion that the auto industry will outperform the broad market in 2014. My top picks in the space are General Motors and Fiat. The General has approximately 25% of its market cap in cash ("Fortress" balance sheet).
I feel fair value for Tesla is around $70 per share. Others are currently making their entry into the luxury electric car market, including Cadillac and Porsche. The Tesla Model S is a great product, but the stock is overvalued by almost any valuation methodology.