I can still hear the echoes of laughter since I began my series of articles outlining why I believe Tesla (TSLA) could eventually reach $500 per share years down the road. Very soon after I published that article, Tesla was bombarded with negative press over three car fires and the stock price took a huge hit. Bears everywhere applauded and laughed at bulls like me, claiming the Tesla bubble has burst and the price movement was some sort of proof that Tesla was never going to $500 per share. Since that time, and as of the time of this writing, Tesla has recovered virtually all of its decline from all-time highs and closed the after hours session on Friday at $187.10 per share, just 3.8% shy of the $194.50 high.
Part of my optimistic hope for $500 per share involves reaching a lofty-looking PE of 100 as I outlined in my most recent article, Look For Tesla To Dramatically Raise Its Guidance: $500 Target Remains. I believe since the publication of that article a number of events have occurred that pave the way a little closer toward the $500 per share eventual level.
At the time of that most recent article on January 28, Tesla had for the fourth quarter average analyst estimates for revenue of $657 million and earnings per share of $0.18. I contended then and reiterate now that analysts are underestimating the figures. Tesla has already revealed that it delivered 6,900 vehicles and had previously forecasted the average revenue per vehicle would be similar to the third quarter. That puts the revenue at $759 million. Since that time one analyst has raised his estimate to $758.1 million which is almost exactly even with my estimate. The average is still $663.2 million according to Yahoo so expect to see either that number rise by earnings date or for Tesla to blow away that number. The average earnings estimate is now $0.19 and one analyst has it as high as $0.30. Based on the revenue estimates, the $0.30 one is probably the one closer to what Tesla will report.
In the last two weeks, Tesla's crew finished driving from coast to coast in record time in a marketing move designed to show the safety, reliability, ease, comfort, and speed of its vehicles to the general public. Seeking Alpha contributor Quoth the Raven published an excellent analysis on this. Throughout the journey, Tesla was posting frequent twitter updates along with pictures. Admit it, longs and Tesla fans, although we were confident that Tesla would complete the quest, a part of us were secretly worried, watching the twitter feed from the edge of our seats. For I believe it was a few hundred miles, the Tesla crew were battling heavy snow fall and snow accumulation in the road as well as frigid cold temperatures. One of their gas-powered support vans couldn't finish the trip and was forced to stop in Chicago. We're all naturally fearful of new technology especially when it's something that puts our safety at risk such as an automobile. As Tesla successfully finished the trip, we all breathed a sigh of relief even if we don't want to admit it in public. They did it! And they did it, unplanned, under the worst of conditions. What timing! That sigh of relief, that last little bit of skepticism reduced and trust built, you can bet your behind will help further increase already overheated demand as Tesla continues to ramp up production.
Expect the orders to continue to accelerate.
Then on Friday, possibly even more interesting from a demand perspective, Elon Musk, the CEO of Tesla, tweeted:
Wow! If that's not evidence of overwhelming demand, I don't know what is. It reminds me a bit of the 2005/2006 timeframe when housing was in such demand that people would buy homes before they were even finished being built knowing that they can flip them for a huge profit once finished simply because the buyer wouldn't have to wait any longer. Houses are supposed to appreciate over time though. Vehicles not so much. In the article that Musk linked, it compares the premium paid for used Tesla cars to the $10 people will pay to watch a movie in the theatre rather than waiting for it to be available for rental much cheaper. It's an excellent sign that as Tesla increases production to say double or triple the current rate that the inventory likely won't be collecting dust for very long. What's the conventional wisdom -- as soon as you drive a new car off the lot it loses one-third of its value? Not with Tesla. Drive it around for a few months, and it still retains its full value and then some. You can basically drive for free, literally, for months then sell it for your money back plus more. What a deal.
Meanwhile, analyst estimates for 2014 EPS continue to creep up and are now up from $1.53 to $1.59. Based on the slow-adjusting analysts for the fourth-quarter, expect to see these numbers continue to rise. The high estimate is now $2.23 -- is that number more realistic to what Tesla will earn just like the analyst who is estimating the fourth quarter to show $759.1 million? Probably.
I have stated that we need to see $5.00 per share in earnings to maybe have a P/E ratio of 100 and a share price of $500. If the $0.30 per share for the fourth quarter analyst is correct, then Tesla will have earned $0.73 per share for 2013. This means the $2.23 estimate of 2014 is 205% higher.
In order to maybe get to $5.00 in EPS some day, Tesla would then need to increase EPS by another 124% over 2014 some day. The sooner it can do it, if it can do it, the easier and more likely a P/E of 100 will hold up. At the time of this writing, Tesla has a 2014 forward P/E of 117 so there would need to be similar optimism and excitement among the shareholder base and perhaps the market as a whole if and when Tesla earns $5.00 per share. It would be difficult to claim such a feat is impossible.
Now how can Tesla get to $5.00 EPS? There are far too many unknowns with such a rapidly changing company that perfect modeling is far from possible despite what many bulls and bears may claim (Seeking Alpha contributor Logical Thought for example seems to think Musk and the entire supercharge network is done improving). I'll take a stab at the risk of oversimplifying. Double production in the future compared to 2014 would likely lead to more than double earnings. Tesla would be able to leverage its overhead, improve its variable cost structure (as it did throughout 2013), and continue to invest in R&D and build out of its supercharger network (at double the pace) while maintaining the same bottom line earnings. $2.23 times 2 is $4.46 so $5.00 would be within reach with only a little bit of improved margins or leverage. Keep in mind the $2.23 estimate for 2014 is based on 10% bottom line profit margins. If double the sales results in a mere extra 1% margins or 11%, then Tesla will be earning $5.00 per share.
Bears will be quick to point out that even if Tesla earns $5.00 EPS, there is no way a 100 P/E is justified. Justified or not, crazier things happen in the market and one thing for sure is you'd have a hard time convincing me that Tesla is a good short to back under $100 when $5.00 EPS is even a possibility. Unless there is an all out market-wide implosion, I can't see a P/E ratio under 20 while Tesla is rapidly growing sales and earnings and continuing to make headlines daily.
Then there's the wild cards. Anybody who thinks we should be using today's metrics only to value Tesla going forward hasn't been paying attention. Musk and his crew continue to innovate in a way that never fails to positively shock the street. Tesla is also exploring non-vehicle revenue streams as its battery technology and production expand. The unknowns on innovation of its vehicles and the unknowns of possible additional revenue streams, with details that could come out at any moment, should be enough to me at least that makes shorting very scary. Being long Tesla has its own risks and uncertainties of the unknowns, and isn't for the faint at heart given its stock price volatility, but I believe shorting it is even more dangerous.
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