Tesla Motors designs, develops and manufactures high-performance, fully electric vehicles (EVs) and electric vehicle power-train components. The company was incorporated in 2003, and introduced their first vehicle, the Tesla Roadster in early 2008. As of 2009, the company has sold approximately 1,650 Roadsters. To broaden beyond the $110,000+ Roadster, the company is designing its second platform, the Model S, for a lower, but still luxury priced market, with a broader customer base and higher volumes. Production of the Model S is not expected until mid 2012, and as of March 31st, the company has approximately 4,300 reservations for which customers have paid a reserve payment.
Risks Related to Business
The risks to Tesla are stated in great detail in the sec filings. As is typical with these types of reports, there are almost too many risks to comprehend, which we think is the point in most of these reports. They list so many risks, in extremely scary language, to the point that the average reader won’t even bother to read them.
However, in this case, we think it is worth a few minutes to consider what Tesla is trying to do: create a new car company, in a completely new category of product, using unproven technology, with unknown consumer demand. This is a tiny car company trying to launch an all-new car to compete at a time when plug-in Toyota Hybrids, Nissan ((OTC:NSANF)) Leafs, and Chevy Volts will be in the market. In addition, they need to build some serious manufacturing capacity, and expand a sales and service network. It would be one thing if Tesla was doing this with 1 or 2 % of their company resources, like their big competitors, but this will be Tesla’s only vehicle.
We can’t think of another company trying to do so many difficult and new things, all in such a short time, with (relatively) so few resources.
Valuing the Investment
For early stage technology companies, (and we view Tesla as a tech company at this point in their history), we have a fairly simple valuation model that screens the good investments from the bad ones. Essentially, we make assumptions about future revenue growth and about the after tax net profits. We do a present value calculation to put a value on those future earnings, and from that we estimate how much we should pay for a share of those earnings.
Here’s one: let’s assume (optimistically) that they start shipping Model S in mid 2012. Year 1 revenue growth without the Model S would be minimal. For Year 2 we assume they can build and sell 5,000 Model S’ for $60,000 each (revenue $300 million). Let’s assume they build and sell enough cars to grow revenue by 50% every year for another ten years. Let’s assume they can finance all that growth cost effectively. Let’s assume that after a couple of years of losses, they can quickly grow earnings to the 8% net profit after tax range (very good for a car company).
A billion dollars in earnings pretty much assumes that none of the many risks listed by the company become a problem. Less optimistically, if Tesla is late by one year in getting to volume shipments of the Model S, or if one of two of those risk items identified in Tesla SEC filings were to happen, then most of the $1 billion disappears. Such is the unforgiving financial reality of paying out for development costs in present dollars, but collecting the benefits in heavily discounted dollars.
I can hear the howls of protest already – we are being too hard on Tesla by discounting the value of its future earnings. Our argument for not doing that is that we would have to discount the value of those future earnings so heavily (to allow for the uncertainty about Tesla’s world will look like after 2023), that the present value of those distant earnings would be near zero anyway.
We value all early stage tech businesses this way, and we don’t see a reason to make an exception for Tesla, no matter how good the karma. In round numbers, a billion dollars, if shared by some 130,000,000 diluted shares, is worth about $8 a share. Granted, it’s a quick and dirty test, but we’ll be passing up on this investment.