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Tesla's (NASDAQ:TSLA) stock was on fire last year and has increased by over 418% to date. TSLA looks to have a promising future but this steep hike in stock price needs to be analyzed to see whether it is justified given the fundamentals of company.

This article will explore the fundamentals that support the positive outlook of the company. The article will also determine whether Tesla's share price is properly valued at these record high levels or if the company is overvalued. The following chart shows how TSLA's stock rose from just $40 to $204, reflecting a staggering 418% gain in the past year.

(click to enlarge)

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TSLA now Targeting the Mass Market

TSLA's niche vehicles Roadster and Model S cost around $100,000 and $62,500 and have good but limited growth prospects. TSLA's decision to introduce its third generation car models for the mass market priced around $35,000 is expected to open new doors for profitability. TSLA will be able to target the rapidly growing middle class of the emerging markets.

TSLA is working in partnership with its suppliers to integrate production processes in one facility and expects that this facility will allow it to create an electric car that is innovative and affordable in around three years.

Government Support for Electric Auto Industry

Governments around the world are trying to reduce their dependence on fossil fuel and are encouraging the use of energy efficient electric cars. Governments are offering tax credits to encourage the purchase of electric cars instead of cars run using fossil fuels.

A tax credit of up to $7,500 in the US for the buying of advanced technology vehicles is a good incentive for customers to consider buying an electric car. Governments in many countries around the world are also offering tax incentives to encourage electric cars that reduce dependency on fossil fuel. Different forms of tax benefits in the US and other countries are expected to rise in the future. There are several other regulations discouraging carbon emission and supporting the use of electric cars. With the passage of time, electric cars are expected to replace the cars driven by fossil fuel and TSLA is expected to gain a lot of growth from this trend in the coming years.

Changing Customer Behavior in Rising Fuel Costs

In recent years, consumers have been troubled by rising fuel prices. Reduction in battery prices are expected to attract more customers to electric cars in the coming years. There is some uncertainty about the relative performance and maintenance cost of electric cars versus conventional fuel cars but with the evolving technology, electric cars are expected to become a proven alternative in a few years. Changing customer behavior is likely to fuel the growth and profitability of this electric car pioneer and innovator in the coming years.

Rapid Increase in Demand for Model S

In 2014, TSLA is expecting to sell around 35,000 units of its Model S reflecting a 55% increase compared to sales in 2013. The company is expanding its manufacturing facility to meet this increase in expected demand. TSLA is expecting to increase its production from 600 cars per week to 1,000 cars per week by the end of this year.

In 2013, TSLA sold around 22,500 cars and most of them were sold in the US. TSLA is aiming at other markets and expects positive demand for its Model S overseas. TSLA expects that China will contribute to one third of the sales growth in 2014. TSLA plans to open stores in 10 to 12 cities by the end of 2014. TSLA expects to penetrate into other markets that will give it top and bottom line growth.

Model X to be Launched Soon

The company is working on its next generation of vehicles named Model X. The prototype is expected to hit the road by the end of 2014 and TSLA expects to start delivery in spring of 2015. There is excitement about this upcoming Model.

TSLA is a Leading Battery Component Innovator

TSLA is a leading innovator in evolving battery technology. The company has an edge in its cylindrical form battery. TSLA provides a number of battery options for its Model S and it offers a better range of batteries compared to other electric vehicle manufacturers. Other auto manufacturers like Toyota (NYSE:TM) and Daimler (DAI) recognize Tesla's edge and buy power Trans /battery components from TSLA. Toyota knows the strategic importance of TSLA in the battery industry and invested $50 million in its IPO in 2010. As a leader in battery technology, Tesla is expected to benefit from the increasing demand of Trans and battery components.

TSLA is investing in its battery strength and it is working on its new production facility named Giga Factory that will help TSLA achieve cost reduction for its battery packs and that is expected to accelerate the pace of battery innovation. With such investments, TSLA is expected to retain its position as a top battery innovator and supplier in the future.

Falling battery prices

When TSLA first introduced its Roadster in 2008, the battery cost was nearly $680 per kWh for 53 kWh capacities and this price declined to $472 per kWh in 2010 when TSLA introduced the Roadster 2.5. Battery costs are expected to further decrease in the coming years with advancements in technology and achievement of economies of scale. This will enable car manufacturers to manufacture and offer cheaper models for mass market.

This trend is expected to help TSLA become successful in its low cost third generation vehicles that it has targeted for mass market production as discussed above. TSLA would also benefit from an increase in demand for batteries from other manufacturer that source batteries and related products from TSLA.

Deutsche Bank Auto team Lithium-ion battery forecast ($ per kWh)

Conclusion

While there is excitement among investors about the outlook of TSLA, at the same time there are concerns that the current stock price level is considered too high. Share price gained around 418% in a year and it is argued that the share price at its current levels is expensive. Presently, all the returns and margins except gross profit margin are negative. TSLA is a trend setting company that could turn the world from fossil fuel run cars to high performance electric cars. The company is investing in capabilities and strengthening its foothold to capitalize on the emerging trends that favor TSLA as discussed in the article. I believe that TSLA's share price is not overvalued and long-term investors should think of taking a position in this new technology stock that has great prospects.

Source: Tesla: Leading The Shift Towards Electric Cars