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  • How Much Further Can Tesla Go ?

    How much further can Tesla stock price rise?

    If I were a Tesla Fanboy + die hard TSLA investor with rose colored glasses and also an investor with a 10 year horizon, I would be imagining Tesla becoming the No:1 Luxury car maker in the world by 2023. In 2012, it was BMW and they sold 350000 cars beating Mercedes Benz which sold 305000 cars.

    Now BMW sales includes the Mini and the high selling 3 series cars which retail for $30000-$50000. One can argue most of their sales were these "lower priced" cars and the ultra luxury (>$80000) cars were just a small % of the total. But since I am a true believer here, I am going to assume 50% of that number i.e. 175000 cars were the cars with a retail average price of $80000.

    Why am I fixated upon this $80000 figure? Or as some may ask, where did I pull it out of ? Well in 2013 Q2 Tesla just announced they sold 5150 cars with revenues of $405 million. Dividing revenues by car sales, I figured that each car sold for approximately $80000.

    Tesla also told us that they are on track to hit record gross margins of 25% by Q4 2013. I am just going to assume they are already there now (why not!). So they make gross profits of approximately $20000 per car. That's very cool!

    Now like every car company Tesla has to have some SG&A expense (I know, i know they are going to sell these things online and by pass dealers etc), but they still have to advertise, pay for overheads etc, so lets assume a minimal 5% of Sales Prices as SG&A.

    Tesla is a new generation HiTech car company, so they have probably have to invest in R&D, but lets assume that's just 2.5% of the sales price. (Not much I know, but we are bullish here, especially since I marked SG&A at 5%). Also remember R&D is what sustains their Moat, so they literally have to do this.

    Again like any other manufacturer, they also probably have some CapEx. Please indulge me here a bit by ignoring the growth CapEx they might spend. Lets just assume they only spend on maintaining the place. So standard maintenance CapEx of 2.5% of Revenues (or sales price).

    Lets also assume, they don't spend money on anything else unnecessary like Electric Charging Stations (why is the Fed Govt there for?), new plants, interest expense etc. all zero We are running a mean shop here!

    How do the numbers look now if they are going to sell 175000 cars a year in 2023?

    Revenues : 175K*80K = $14 billion

    Cost of goods: 14bill*(1-25%) = $10.5 billion

    Gross Income = $3.5 billion

    SG&A Expense = 5%*14bill = $0.7 billion

    R&D Expense = 2.5%*14bill = $0.35 billion

    Maintenance CapEx=2.5%*14bill = $0.35 billion

    Other Expenses = 0%*$0 = $0 billion

    Operating Income = $3.5-$0.7-$0.35-$0.35 = $2.1 billion

    Now comes the sad part. After 10 years when we have Tesla cars everywhere on the road, this clean energy efficient car becomes the Big Car company, so Uncle Sam would want to take his share, unlike now, when companies such as Tesla are being incubated by being given the preferential tax credits. But lets assume Tesla manages to pay the average 25% tax rate.

    Taxes Owed = 25%*2.1 bill = $0.525 bill


    Net Income = $2.1-$0.525 = $1.575 bill

    Currently Tesla seems to have approximately 125 million shares outstanding on a fully diluted basis. Lets assume they are not going to issue any new stock anymore or even pay out in stock options.

    So, 10 years from now, when Tesla is a market leader in the luxury car segment, their EPS will be about $1.575 bill/ 125 mill = $12.6 (compared to 20 cents this quarter, but this just shows the hidden potential here).

    In 10 years, I don't know what the interest rates are going to be or what the PE on the SP500 is going to be like, but I am going to assume it will be just like today. It is fair to assume car companies will also probably be trading around the same PE multiple as today.

    BMW is currently trading at PE of 9 (but there is a mess in Europe now, so I am going to focus on US)

    Ford is currently trading at PE of 11 (But that's Ford, they just don't have the cachet)

    GM is trading at PE of 12.5 (seems reasonable)

    I think I like GM better, after all Tesla is going to be just like GM was to the prior generation of Americans. So I am going to use GM's multiple.


    Applying a multiple of 12.5 to Tesla EPS of 12.6 (in 2023) we get

    Hold your breath.....

    Fair Value Stock price in the year 2023 of $158.76 !!!!

    It is trading today after hours at? $153.2.

    So I am on track to get a cumulative 10 year return of an amazing 3.63% or 36 bps annualized!!!!!!!! What's the 3 month T-Bill yield again?


    Disclosure: I am long GOOG, AAPL, MSFT, AIG, INTC.

    Additional disclosure: I am neither Long nor Short Tesla stock currently. I have no intention of taking either position in the next few days or weeks. Also this blog doesn't constitute investment advice. I am not recommending a position via this blog. Neither am I expressing any opinion about the companies mentioned here or their products. I might even secretly admire the cars I have talked about here and might someday end up buying one of those. I just found the current valuation interesting and mustered the courage to write about it. I sincerely hope I am protected by the First Amendment (or is it Second Amendment! if you push me I will have to take the Fifth) Anyway before investing or selling short any of the companies mentioned here, please do your own due diligence and come to your own conclusions. Please remember you are not right or wrong because someone said so, but only because your facts are right.

    Aug 08 10:38 AM | Link | 2 Comments
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