Projecting The Market Value Of Tesla Motors

Aug.31.11 | About: Tesla Motors (TSLA)

In this corner, the EV-Skeptics! In that corner, the EV-Angelists!

Anyone paying attention to comments on SA about Tesla Motors (NASDAQ:TSLA) the electric car company has been treated to a never ending discussion about the merits and practicalities of electric vehicles (EV) versus other vehicles. You could spend your entire week reading the recent debates (and I truly wish I could have that part of my life back). More than likely you have come away more unsure about the TRUTH than before you began.

Two camps exist, the EV-Skeptics and the EV-Angelists. Each is throwing out their favorite factoids. Each is totally certain they know the TRUTH. Each discounts the other’s arguments. The debates have all the appearance of a religious debate. Much is accepted based on faith. Neither camp is going to change their position, ever. It may take until eternity to find out who is right.

What’s an investor to do? Should you buy into Tesla? We call those undecided investors souls EV-Nostics. If you are inclined to buy the stock, how much should you pay for it?

We decided to take one of the more optimistic views of EV sales, and work out a EV-Angelist's view of the potential value for Tesla in the future.

To estimate the earnings, we took the recent market estimate by Pike research (cited by EV-Angelists as proof that they are the true representatives of the TRUTH). Pike Research anticipates “that the annual market for hybrid electric and plug-in electric vehicles will grow to 2.9 million vehicles by 2017”.

The Pike estimate assumes that a market that exists of 114,000 vehicles in 2011, growing to 2.9 million vehicles in 2017. This works out to a growth rate of approximately 71% per year.

EV-Angelists often proclaim that Tesla will sell 10,000 vehicles next year (based on the company's guidance), and that each of those vehicles will sell for about $75,000. Tesla’s market share based on the Pike estimate for 2011 is about 3 percent, and we can calculate a new market share in 2013 for Tesla of 5%, based on 2012 sales of 10,000 cars and a Pike's market that is increasing annually by 71 percent. For our long term projection, we keep the 5% market share estimate for Tesla, and increase the total market until 2017 by 71% CAGR per year until we reach Pike’s estimate of 2.9 million cars.

Back of the envelope, Tesla would sell 145,290 cars in 2017, at $75,000 each, for a total revenue of $11 billion dollars.





Market Share





Model S







$ 256





$ 745





$ 1,252





$ 2,141





$ 3,662





$ 6,263





$ 10,900

Click to enlarge

What would Tesla be worth in 2017? It’s hard to say, but since EV-Angelists like to compare Tesla to Apple Computer (NASDAQ:AAPL), let’s use Apple’s Price/Sales ratio of 3.54. [Toyota’s (NYSE:TM) price to sales is only 0.98, but really what does Toyota know about electric vehicles really?] By the Apple measure, Tesla, with just a meager 5% market share, would be worth $ 38 billion in 2017.

What’s more, if Pike’s 71% growth estimate and Tesla’s 5% market share could only hold on for just five more years, until 2022, Tesla will be selling 1.24 million cars per year and have exceeded Apple’s current $361 billion market cap to possibly become the-most-valuable-company-in-the-world!

Sorry, I was getting ahead of myself. Let’s go back to the 2017 valuation. With Tesla selling for a present value market capitalization of $2.5 billion, and a potential value in six years could be $38 billion. This would imply a return on investment of 1500% in just six years.

It seems, if Pike Research and the EV-Angelists are right, EV-Angelists will all be filthy rich very soon.

We hope they will still talk to us humble EV-Nostics.

Let's take another look, and consider a few of the things that could go wrong. For a fairly complete list of the risks, we refer you to Tesla's own SEC 10-K filing:

1. The economy could be weak, reducing the number of people willing to pay $75K for the car.

2. The market might not grow at 71% per year. After all, what crystal ball does Pike Research have? For comparison, the growth of Toyota's Prius was about 40% per year, and the Prius had almost no competition.

3. Tesla might stumble on the launch of the Model S. After all they have never built a whole car. It's possible there might be a delay or two in getting the first 10,000 cars built. This could affect Tesla's ability to capture and keep 5% of the market.

4. Financing might be expensive, and may in fact be dilutive to the shares.

5. Defects or technology problems could result in recalls and heavy warranty costs.

6. Tesla might not capture 5% of the worldwide market, for any number of competitive reasons.

7. Governments might stop subsidizing electric cars to the same extent, or impose other impediments such as increased power charges, or fees for battery recycling.

8. Consumers may just decide they prefer other plug in cars to Tesla's.

9. Investors may choose not to value Tesla using the Apple price to sales ratio of 3.54/1. Perhaps investors will use something closer to 1/1, closer to Toyota ratio, or even .25/1 which is closer to GM's (NYSE:GM) ratio.

VineSecurityJournal valuations are based on our standard technique for technology companies. We estimate future earnings, and discount those earnings based on a assessment of risk. In this case we also assume that a lot of things go right for the company including getting the 10,000 units out the door, and achieving respectable growth, and profitability after that. We also assume that future financing will not be dilutive.

For Tesla, we begin by assuming that they will produce and sell the 10,000 vehicles they promise starting mid 2012, that they will grow revenues at 40% per year after that, and that after a couple of years of losses they will generate 7% net profit after tax, which is pretty good for a car company. We discount those earnings to get a risk adjusted present value for the company.

Based on those (we believe moderately optimistic) assumptions our target price for Tesla is $13. We aren't fond of selling short, but we are considering buying Put options.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.