Since 90% of Tesla's (NASDAQ:TSLA) revenues are expected to come from the Model S this year as well as next year, it will not be wrong to say that a successful Model S will lead to progress for Tesla.
Therefore, discussing the future of the Model S is like discussing the future of TSLA. When the market first heard exuberant CEO Elon Musk declaring that 50% of the cars produced in 2032 will be electric vehicles (EV), nobody believed him. Most thought it was nothing more than pandering to the shareholders. Many considered a single digit growth rate for the EV market.
However, since the launch of the Model S, the views have changed considerably. Moreover, the fuel emission targets set by the Obama administration for 2025 and Japan's expanding EV market have illuminated the story of EV.
Above all else, the main reason behind the recent success of the Model S has been its unique features, such as solid engine power and 0-60 mph acceleration, which has forced its audience to compare it not only with other EV, but also with BMWs, Benz AMGs and the Porsches of the automotive world.
Therefore, the Model S does not have a demand problem, as was anticipated by the market. However, supply may be an issue for the carmaker, as it plans to roll out almost 60 Model Ss per day next year, as compared to the present rate of 10-11 cars per day. However, the company has established great credibility with its shareholders, and it will be no surprise if the company achieves the target by exponentially expanding production capabilities.
EV Market & Obama's Energy Ruling
The current EV market gives a confused outlook. Currently, fewer than 13 million cars are sold in the U.S. each year, and EV (including hybrids) account for only 2% of the market. However, due to the increasing trend of the government opting for a greener U.S., the market predicts that the EV market will grow by a CAGR of 32% till 2020. Amidst all of this, there are examples like General Motor's (NYSE:GM) Chevy Volt, whose production has been halted given a weak demand for EV. GM has been able to sell only 10,000 Volts this year up till now, which is well short of its target to sell 45,000 Volts for this year in the U.S. alone.
The market is expected to expand after the recent ruling by the Obama administration to achieve almost double the current fuel economy in 2025. The current average fuel economy is 28.6 miles per gallon (mpg). Obama wants to see it grow to 54.5 mpg in 2025. The state has also established intermediate goals, and companies who do not meet these goals will be fined accordingly. One of the goals is to achieve an average fuel economy of 35.5 mpg by 2016, which is 24% greater than the current level.
The Model S is expected to gain from Obama's energy drives. Under this law, credits will be awarded to the producers of natural gas cars and EV. Also, the companies that use other fuel saving techniques, such as start stop engines and efficient air conditioning mechanisms, will win some credits. Therefore, production of EV will win Tesla credits. Tesla can sell those credits to the companies who have not been able to meet their pollution quotas, resulting in a monetary benefit.
Also, the average price per car is expected to go up by $1,800 due to the increase in costs brought by technological advancements. However, this does not hold true for EVs like the Model S, which is already compliant with the law.
As far as the growth rate for the EV market is concerned, the Model S has clearly outperformed the market by securing orders for more than 12,000 Model Ss in a span of 2-3 months. The reason for this success has been largely because of the Model S having features that give it access to the market for luxury sedans as well. This is reflected by Musk's words:
The trick with EVs is we've got to make cars that are more compelling as products than electric cars. That's really critical for the mass adoption of electric cars. You can't tell people, buy this electric car it's ugly, it's slow, it's got a lower range.
What makes Model S so special?
Comparing it with other electric cars, we definitely have a better product in the form of the Model S with regards to range, acceleration, mpge (mile per gallon equivalent) and recharge speed. It is only with regards to price where the Model S is deemed to be expensive as compared to its competitors. However, here, Musk says that it is not the other EV, but the luxury cars that the Model S is competing against. Following is the chart of the factors discussed above:
The table shows that price is the only factor where the Model S is behind its competitors. Also, the range for the Model S is up to 300 miles while the acceleration is 0-60 mph in 3.9 seconds.
The table does not show the noise levels created by electric cars, which is one of the major complaints made by the users of EVs. The users of Tesla have commented that the car's sound track is no more than a hushed 'ssshhhh . "It is as if you are listening to a fast gasoline car, while wearing Bose noise-canceling headphones."
Following shows the Model S as compared to other luxury cars:
The table shows that the Model S, in the same price package, provides a better 'fuel' economy. Users of luxury cars have complained that bodies of EVs are much heavier because of the bulky lithium batteries that are installed in the cars. However, Tesla addresses that concern by using aluminum bodies, which has placed it on par with other bodies:
Demand and Supply
Tesla needed 8,000 Model Ss to be sold to break even. However, after having a demand of more than 12,500, it seems pretty clear that according to Musk, Tesla will start making profits by 2013. Not only this, Tesla is also viewing a huge market outside the U.S. The Model S is expected to start being sold in Japan in 2013. Given the fast growing Japanese EV market and the Model S's superior features to all other electric vehicles hitting Japanese roads, Tesla has a big opportunity ahead. According to the EPA document reiterating the new average fuel economy, the demand for the Model S is expected to be 31,975 per annum by the end of 2025. However, in anticipation, Musk will produce 5,000 cars this year and 20,000 the next year.
The sell side expects the company to make $130 million in revenues in the third quarter, and a loss of 67 cents per share. EBITDA is expected to be $140 million by the end of 2013. The cash flows from operations are also expected to turn positive by the end of 2013. Trading at a multiple of 44x, the stock is expected to go up as the Model S attracts new orders and the supply is increased accordingly. Important catalysts are:
- Increase in production capabilities.
- Election results; Mitt Romney is said to be extremely against all incentives being paid to the developers of green technology.
- Progress of product line up expansion like the Model X and Gen III.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Industrials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.