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Summary

  • Tesla has a price target potential of $260 in 2014.
  • What inputs give Tesla this price target?
  • Is Tesla a socially responsible investment?

We are going to take a deep look at Tesla Motors (NASDAQ:TSLA) today. The point of this article is to provide a two-pronged approach to investing. On one side, we are interested in investing in socially responsible companies. On the other hand, we are interested in investing in companies that can make us money. The focus of our articles is to look at companies from a socially responsible perspective as well as from an investor perspective -- then meet somewhere in the middle. We hope you enjoy these articles, and they give you a better sense of how to use social responsibility to invest. This article will be broken into two parts with the first part diving into the potential price tag for TSLA, which we have targeted at $260 in our best-case scenario. In part two, we will talk more in depth about the socially responsible model that the company is using, and why we believe this company is a great investment beyond just their potential to grow share price in 2014 and beyond.

Tesla Pricing

Tesla has enjoyed quite the ride over the past year, up 135% year-to-date. The company has had a rough quarter, down a bit over 2%. Today, we want to focus on the investing implications for Tesla as well as the socially responsible implications as well. To investigate, we will start with whether or not Tesla is a good investment right now. To do that, we want to build a cash flow model, focusing on revenue, profits, costs, and more. From there, we will investigate the ethical aspects of this company. Let's take a five-year look at the company for these models.

To start, though, Tesla is expensive (as we all know). Don't believe me:

(click to enlarge)

Yet, the difference between these and the rest is that the future potential is so great for Tesla. It sells a tiny fraction of the cars compared to these, but the company is disrupting technology, making it very hard to value in typical ways. We want to do our best job to try and hash out the next few years. Just in case you were wondering, here is where Goldman thinks Tesla will be in 2025:

(click to enlarge)

Revenue

For Tesla, the revenue for the company can be broken into current models (Model S and X), international growth, and future models over the next five years. What we want to look at today is what might be the potential of these various areas of revenue. The success of Tesla has been due to strength in Model S growth, hope for Model X and Gen III or Model E, and strong potential in foreign markets. Let's start with the Model S.

In 2013, the company sold roughly 22,500 Model S vehicles last year. The company projected in Q4 2013 that it would deliver 35,000 Model S in 2014. The company, in the Q1 2014 report, confirmed that projection. They delivered 7,500 Model S in Q1 with expectations that they can deliver around 8,500-9,000 Model S vehicles in Q2 2014. The growth of the Model S, we believe, will mostly come from international sales over a large boost domestically. The international potential, though, does look quite interesting. Additionally, a sales peak may even occur domestically as those that would transfer over will start to curb. Yet, I believe that the Model S is a "disruptive technology" that could continue to offer growth of overall sales for quite some time - at least until the full line is built out in 2017-2018.

With the rate of China at the USA by 2015, we could see 25-30K units sold in China by that time, which would drastically increase overall sales in that year. The Oxen Group does a great job of laying out this argument:

As Tesla noted in its Q4 & Full Year 2013 Shareholder Letter, "the potential in Europe and Asia is even more significant. Towards the end of the year, we expect sales in those regions combined to be almost twice that of North America." The potential in China appears to be the best chance for Tesla over all others, while we do have some questions about Europe. There is a favorable tax/tariff situation in China that will likely continue to offer growth there for luxury cars. According to some studies, car exhaust is the second-largest cause of haze problems in China, and the company wants to take steps to continue to reduce those emissions.

The Model S price for the Chinese market was set at $121,280, a 50% increase from the $81,000 price tag in the United States. At such a hefty price tag, can Tesla be competitive with other carmakers?

The answer is yes. While the price tag may seem outrageous, it is actually as low as Tesla can go. Fact is, much of the price difference is due to additional costs of exporting the vehicle. Here is the breakdown of additional costs associated with exporting to China:

- $3,600 shipping costs

- $19,000 customs and taxes

- $17,700 value added tax

It may be hard to explain to a Chinese customer that he is actually paying the same amount as US buyers, but one does not have to. Truth is, compared to other competitors in the luxury segment of China; the Model S is priced cheaper.

Model

Lexus

LS

Mercedes S Class

Porsche Panamera

BMW 7 Series

Hyundai Equus

Audi

A7

Tesla Model S

Starting Price (RMB)

1,490,000

1,248,000

1,138,000

933,500

738,000

698,000

734,4000

Looking more deeply at China, though, infrastructure does remain an issue. There are not service stations in China of significance, which could hurt the company in some ways. For that reason, we believe some of the goals may be a bit lofty for the company. Yet, they will definitely continue to see a significant demand increase in the Asian nations.

Besides price, how fast the infrastructure will develop is another factor that will affect demand. As of last month, there was only one service station and one showroom in Beijing, with another to follow in Shanghai. An added benefit is that Tesla does not have traditional dealerships that require extensive square footage. In contrast, some showrooms in the US are as big as an average clothing retail store, enough to fit one or two Model S cars. This means less capital required for expansion. Capacity for production is not an issue, as the company can use its partners to produce 500K vehicles annually.

Overall, though, a move to 45,000-50,000 units in 2015 seems likely, and the company could move up another 10,000 units or more in 2016 and 2017, bringing us to the Model X and Model E. The Model X has been delayed until 2015, but we believe it will be another big winner. The SUV prototype has had a number of delays, but given a demand for SUVs in the USA, it will likely be another big winner that can rival the success of Range Rover, BMW X, and Mercedes G-series. We believe around 20-30K will be hit in 2015 depending on debut with around 35K in 2016-2017, outpacing the 30K rate for the Mercedes GL in 2013.

The Model E or Gen III is expected to release in 2016-2017, and this is the model that really changes everything for Tesla. A lot of the future growth that is priced in Tesla comes from the belief in this model, which will likely come in around the $35K price point at the base-level. The car has significant potential to hit up to 80K if not more units per year, which is the level that the LS from Lexus (the highest volume in the mid-level price point) is selling for most years. We would say 2017 it could hit the streets, and it may see those levels by 2018.

Revenue Breakdown:

Year

Units Sold

Revenue Potential

2014

35K

3.75B

2015

70K (Model S + Model X)

5.60B

2016

90K

7.10B

2017

150K (Add Model E)

9.8B

2018

200K

12.0B

Tax Rate -

We are not looking for any taxes through 2015 with up to 20% in 2018.

Margins -

The company has noted they have a goal to get to Porsche-level margins, which is around 25% gross margin, 15% operating margin, and 8-10% net margin. In our best-case model, we will use 15% for operating and 12% in our low-end model.

Five-Year Analysis -

PROJECTIONS

1

2

3

4

5

Income from Operations

2014

2015

2016

2017

2018

Income Taxes

450

728

994

1470

1800

Net Op. Profit After Taxes

0

0

198.8

294

360

450

728

795.2

1176

1440

Plus: Depreciation

Less: Capex

200

260

320

360

400

Less: Increase in W/C

-400

-450

-500

-550

-600

Available Cash Flow

150

438

515.2

886

1140

Using a five-year cash flow analysis with these levels that we have set out, I am coming up with a price target in the best-case model at $260 with a worst-case at $180. We, therefore, will use $220 as our price target. For that reason, we would likely be a buyer below $200 in the $180-$190 area.

Social Responsibility - Disruptive Technology

One of the reasons we most like Tesla is because of its disruptive technology and that it is challenging the norm of what we believe a car is. Some disruptive technology challenges in a positive way to create change in a capitalistic structure, while other disruptive technology tends to simply disrupt current thought processes of how a field works. As an investment, the prior seems very attractive. If a technology can not only disrupt current thought on what a "car" (or anything else) actually is but also benefit the social, we believe that is a perfect way to approach investing.

Further, a company that is creating something that is changing an industry is the type of company that has long-term potential if the technology is successful will be the future of that industry. Not every socially responsible company is creating disruptive technology, but those companies that can support socially responsible decisions as well as disrupt an industry are very interesting to us.

We know Tesla has the disruptive element, and it seems like they have the socially responsible aspect. Yet, we need to investigate further.

Are they really better?

I am not going to sit here and pretend to know as much as experts on the technology. So, let's spend some time discussing what the experts think. Starting with - are electric vehicles really better?

Electric vehicles have long been heralded as the alternative to gasoline with its fossil fuel burn and large amount of energy needed to produce gasoline. Forever, though, the cars were small or potentially unattractive to some or marketed to select groups. Tesla in many ways has rethought that issue, but electric vehicles need energy. They emit no emissions on the back-end, but they need energy up front. And in some areas, that car could be running on coal-power and in others solar power. Slate did a great piece on this:

So if you're going to stack a Tesla's per-mile emissions against those of a gas-powered vehicle, you'll need to start by looking at the composition of the electrical grid. Nationally, the grid is roughly 40 percent coal, 25 percent natural gas, 20 percent nuclear power, and about 10 percent renewable sources, led by hydroelectricity. So it's fair to say that your average Tesla is powered in large part by burning fossil fuels. Tesla acknowledges this, and insists that its cars are still far cleaner than their internal-combustion competitors. That's because battery-powered cars are more efficient at converting their stored energy into forward progress. A Model S can travel upwards of 265 miles on a single charge of its 85 kilowatt-hour battery, which equates to less than 3 gallons of gas. Its official EPA miles-per-gallon equivalent is 89, far greater than a standard Toyota Prius.

Additionally, the argument could be made that the process takes time, but Tesla is pushing the needle. Tesla is a car company, not an electric grid company. If every industry had their own Tesla, progress would be made. Yet, a famous article on this site from Nathan Weiss argues that the Tesla is not a clean vehicle at all:

According to the footnotes on Tesla's website, their CO2 calculations are based on a Model S consuming .283 kWh of electricity per mile driven - traveling 300 miles on a full charge of the 85 kWh battery. The reality is that in the 'real world,' drivers of the Tesla Model S have reported higher energy consumption than Tesla and the EPA ratings suggest: By far the largest single source of efficiency data from Model S owners is the 'Lifetime Average Wh/Mile' thread in the Tesla Motors forum, which reveals that the 48 owners of the 85 kWh Model S who posted to the thread realized average power consumption of .367 kWh per mile driven (232 miles per 85 kWh) over 175,629 total miles. Contrary to claims made in the comments about our previous article, we are not cherry-picking data! The 'Lifetime Average Wh/Mile' thread is the largest collection of reported energy consumption by Model S users and a fair representation of the vehicle's efficiency. Using energy consumption of .367 kWh per mile driven rather than .283 kWh per mile driven, the Model S effectively emits 228g of CO2 per mile driven. This puts the effective CO2 emissions of the Model S just above that of the Honda Civic Hybrid (202g per mile) and the popular Prius V (212g per mile). Unfortunately, these calculations do not tell the whole story of the Tesla Model S.

Another knock that critics have is that the ion battery is energy inefficient to produce. And where do you put an ion battery once it's been used up? The waste created here is a big problem.

The question, thus, we have to ask is, are we better off with Tesla or not, and are they socially responsible or not? While we will be spending much more time on this as we continue our experiment, we believe that TSLA is a company that fits into this model because they are bringing attention to a cleaner car for the long term. Most people are obsessed with short-term fixes, and well, they don't work. What works is overhauling the system and disrupting it. That is what Tesla is doing with this car. Look at how far the national grid has come in just five years and how much more efficient and cheaper these catteries are becoming. That's the type of responsibility we can support, and we believe is also what makes Tesla so exciting. It's exciting now and in the future because it's advancing the ball and not looking for short-term reasons to bring it down. I very much appreciate all the work critics do because it is a great part of this equation. Don't hate on the Weiss' of the world because they push Tesla to get better.

Overall, though, we believe that this aspect of Tesla is what makes the car an amazing investment. Not only are you getting something that has financial value, but you are also investing in a company that can help us change the way we think about vehicles. As more people do this, Tesla will only grow in popularity and push the envelope further. Additionally, we believe that as TSLA pushes the electric car, the rest of society will end up playing catch up.

What's today's progress is tomorrow's norm.

Source: Tesla Headed To $260 In 2014: Is It A Socially Responsible Decision?