- The gigafactory plan is most feasible in Texas. It may be located in San Antonio according to sources.
- Texas could rewrite state laws currently preventing the direct sale of Tesla vehicles to 26 million people.
- This would also give Tesla the influence of the 2 largest US states, California and Texas.
- Political struggles are one major downside risk for the company.
- 2017 Price/EBITDA is only 4.8x.
Many articles have been written on Tesla (NASDAQ:TSLA), outlining the superior performance, reliability, customer service, and emissions levels of the company's vehicles. Despite all of these advantages, political resistance has slowed the company down. In many states, auto dealers have blocked the direct sale of Tesla vehicles, limiting deliveries. Tesla is currently planning a game changing factory, dubbed the gigafactory, which conjures up images of Henry Ford's Rogue complex. The huge project has Ford (NYSE:F) and GM (NYSE:GM) baffled, and some are doubting its feasibility. By placing the gigafactory in Texas, Tesla would assure its on-time completion. At the same time, the combined political sway of Texas and California could make a national deal on direct sales imminent.
Texas governor Rick Perry is said to be personally leading the negotiations with Tesla over the gigafactory site. After a failed run for the Republican nomination in 2012, his focus has turned back to state issues. While both parties signed non-disclosure agreements before beginning discussion, some details of a possible agreement have emerged. Rick Perry could offer to rewrite state laws that prevent Tesla from operating direct sales outlets in the state. Texas also has no corporate income tax. The location may be in the San Antonio area according to reports. Other reasons to build the factory in Texas include: a large supply of well-educated labor from UT, Rice, A&M, and other top institutions; the construction resources to get the factory built by 2017; access to one of the largest auto markets in the US; access to the Port of Houston for export; and a wide variety of well-developed support and supply services. With the support of Texas and California, Tesla would quickly become a darling of American industry. Domestic auto sales are estimated to be 15.3 million in 2014. Tesla must only capture a small portion of this market to justify its current valuation.
While Tesla has seen success with the Model S, and plans to release the Model X this year, reducing battery costs is critical to its plans for a true mass-market car. According to Musk, the gigafactory will enable a reduction in battery and manufacturing costs that dramatically drives down the cost of electric vehicles. The Gen III (I hope they call it the Model T for Tesla) could sell for as low as $35,000 and be available for pre-order in 2017.
One other concern is battery fires, but the Senate recently dropped its investigation of the incidents.
To give you an idea of the potential earnings potential of this company, here is a basic valuation based on 2017 Price/EBITDA:
Model S will continue to take share in luxury car market, with average price of $80,000. Recent sales momentum has been strong in some places, like Norway, but generally slowed by political opposition. Momentum should be sustained as this opposition fades away. Model S sales were forecast to reach 35,000 in 2014, which represents an increase of 55%. At this growth rate they would reach 130,000 units globally in 2017.
Model X deliveries will begin by the spring of 2015. R&D work is in late stages. It will likely be priced in a similar range to the Model S, and thus have similar sales potential. I think the Model X may even cannibalize some Model S sales, while also broadening the appeal of electric vehicles. I estimate total 2017 Model S and Model X sales in the 150,000 range, split approximately evenly between the 2 luxury models.
The Model T (Gen III) hits the mass market in mid 2017 with a starting price of $35,000. This is only possible with the Texas gigafactory, otherwise it doesn't come to market until 2018. Elon Musk targeted 500,000 yearly sales for this vehicle. For comparison Camry sold 408,484 vehicles in 2013 and Prius sold 234,228 vehicles. I estimate Tesla can reach 250,000 sales in the second half of 2017.
$6B Model S+$6B Model X+$8.75B Model T = $20.75B Revenue
At year end, the shareholder letter guided for further margin improvements accelerating throughout the year. I estimate 2017 gross margin could reach 35% from the current level of 28%. The gigafactory is essential to cutting costs and improving production efficiency. Without it, margins will not be able to expand.
Revenue x Gross Margin = $7.26B Gross Profit
Operating expenses have grown 22% this year and are forecast to grow at approximately 15% next. They could reach 1.5B by 2017, this represents a significant acceleration due to R&D, and Sales and Marketing expenses.
This leaves $5.76B of EBITDA for a 2017 forward Price/EBITDA of 4.82x. Instead, Tesla will still trade at a multiple of 10x or more, in line with auto industry peers. That would mean stock appreciation of 107% or more. The potential is great, but only if the gigafactory is a success. By placing it in Texas, Tesla eliminates risks to both production and sales. If this happens, use it as a sign to begin accumulating more TSLA shares.