Impact Of Chinese Pricing On Tesla's Growth

| About: Tesla Motors (TSLA)

Tesla (NASDAQ:TSLA) just announced their Chinese pricing for the Model S. The 85kWh version will cost about $121,000 in China. Only an approximate 50% premium to the price in the US. This is very different from other manufacturers. As an example, the Mercedes S Class starts at about $206,000, a 125% premium. More than double the US cost.

Tesla says this might be a big risk, because of the perception that the premium commanded by other cars represents higher quality. However, even though I am not an expert in Chinese culture, I am of the opinion that a customer who can afford that kind of car knows what the car costs in a foreign country and would understand that they are not being gypped by Tesla.

In 2012, Mercedes sold three times as many S Class models in China as they did in the US - over 33,000. In 2013, the Tesla Model S outsold the Mercedes S class and most if not all other cars in the same price category in the US. In China, considering the cheaper pricing, the incentives in China for Electric Vehicles (no purchase tax and incentives in some cities of over $9000 to reduce pollution), the Model S can easily outsell the Mercedes S Class in China.

Tesla has also announced that they will build out their Supercharger network in China.

This information changes the market potential of the Model S. My Tesla model has assumed that Tesla will have a global annual steady state sales of 60,000 for the Model S. However, if Tesla can outsell the S class in China, it can have steady annual sales of 60,000 between China and North America alone. That would put a worldwide steady state annual sales of over 100,000.

This significantly changes my previous Model for Tesla. Here is what Tesla sales could look like going forward assuming they are able to ramp up fast enough.

Tesla might be significantly undervalued for these kinds of sales. For 2018, assuming average price of $100,000 for the Model S and $110,000 for the Model X and $60,000 for the Model E, we would have revenues of $27 billion. At a P/E of 20 and margins of 10%, we would have a market cap of $54 billion in 2018. This gives us a present value with a discount rate of 15% of $27 billion. This is similar to my calculation in my previous article but that assumed margins of 12% and an upside of 25% for the stock.

However, considering that the Gen 3 launch date is still not definite and we are still awaiting details of Tesla's battery factory plans, there is some risk that the ramp up might be slower than my chart. Considering that risk, I would say that currently Tesla is fairly valued or only slightly undervalued. However, the details of their battery factory might change this value overnight. This makes the earnings call a very important event to watch for Tesla investors.

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.