Analyzing The Logic Of Tesla Bears 2 - Valuing Tesla

| About: Tesla Motors (TSLA)

In my previous article Analyzing The Logic Of Tesla Bears, I presented a takedown of Tesla (NASDAQ:TSLA) bears' objections to the growth story. And with this one I will attempt to summarize additional key objections to my previous analysis and also a simple method to come up with a valuation for Tesla extending some thoughts in the comments.

There is a general misunderstanding about inconveniences, range, maintenance and service for electric cars. There are people who are worried that the one or two long trips they take in a year are an inconvenience for Tesla owners. However they choose to ignore the inconvenience of a gas car which I will list below

Gas Electric
Twice monthly gas fill-ups Full Charge every morning
Annual (?) oil changes Annual checkup

Periodic replacement of belts and other miscellaneous maintenance such as fluid leaks, changes etc.

Very few moving parts, minimal maintenance

Service hassles such as cheating dealers and mechanics. If you haven't had a mechanic recommend unnecessary maintenance or a dealer try to gouge you, you are in the minority

Minimal maintenance = minimal hassle with dealers/mechanics

With Tesla, one more added headache is taken care of you. When my wife and me leased our Leaf, to get a decent price, I contacted every dealer within a 100 miles of us for a quote. The initial quote on the lease started at 30% more than what we are paying now. So after spending about 30 hours online chatting, calling and emailing the dealers, we finally picked one and got the car. Only one dealer offered to find the car with the colors/options we wanted. I still get emails from the other dealers. In fact I got calls for at least 5 years from a Honda (NYSE:HMC) dealer after we picked our Nissan (OTCPK:NSANY) Murano over a Honda 10 years ago.

Considering the above, it would be a lot less hassle to rent a car for the two times a year that you need to go beyond the range of a Tesla in case you didn't own another car.

I started out this article listing every car that is a competitor to Tesla and how Tesla is very competitive with other luxury cars even ignoring that it is an Electric. But to make things simple I will go about it differently giving you what exactly it is about Tesla that the other competitors do not have

1. Future Technology - better software, easier updates, even crazy things like adjusting the suspension, possibility of retrofitting self-driving

2. Most important component (battery) is upgradeable easily. Try to upgrade the engine of your 2013 BMW with that of the 2016 when it comes out.

3. The safest car on the road. The best crash test rating ever - the car actually busted some testing equipment. Nearly impossible to rollover. I will repeat from my previous article, it makes me wonder what car makers have been doing all these years.

4. Amongst the quietest, if not the quietest car on the road.

5. Performance. The Tesla outperforms almost any ICE car in its class, almost equaling a more expensive Porsche. Electric drive is just snappier. Also any driver can get the performance as opposed to the experienced driver with perfect shifts.

6. Very good looks. This is subjective but the Tesla is amongst the nicest looking cars on the road.

Now for the meat of this discussion. Putting a value to the stock. For that we need to project sales. The numbers I use below are not overly optimistic, nor are they pessimistic.

  • 2013: 22,000 Model S
  • 2014: 40,000 Model S, Model X is introduced
  • 2015: 60,000 Model S, Model X
  • 2016: 80,000 Model S, Model X
  • 2017: 100,000 Model S, Model X, Gen 3 is introduced
  • 2018: 150,000 Model S, Model X, Gen 3
  • 2019: 200,000 Model S, Model X, Gen 3
  • 2020: ? Model S, X, Gen 3, New Gen 3 based SUV?

In 2019, I expect Tesla to have revenues of at least 15 billion from cars alone. Tesla will also have additional revenue from licensing to Toyota, Mercedes etc. and I would guesstimate a total of 20 billion.

Up until Tesla hits a million cars, half that of BMW group's total current annual production, the Tesla growth story should stay intact, which would lead me to believe that Tesla will carry a high P/E ratio. Also being electric, better margins are expected than gas cars. At a 15% net margin, Tesla would have earnings of 3 billion. And at a P/E of 50 (since the growth is still not done) that is a valuation of 150 billion.

That is more than 7X the current valuation. If you add in some dilution and delays, let's say 5X in six years. Does $200 a share sound more reasonable now? Another take was presented here by Aswath Damodaran, a finance professor and his valuation was 67$/share. In his presentation he gives Tesla a revenue of $65 billion in 2022, however he assumes that Tesla's margins will be similar to those of other automakers.

My argument is that Tesla will command bigger margins than other automakers just like Apple (NASDAQ:AAPL) commands bigger margins on iPhones. I would also argue that until the growth story is closer to being done (when Tesla sells half as many cars as BMW), we will see a higher P/E and thus higher stock price.

I will say that $20 billion is a very high valuation for Tesla and calls for expectations of perfection, but they do have a history of doing things well. I'm excited not only about Tesla but also about our EV future.

One last point of contention from my previous article was the math about superchargers. It is in fact quite simple:

$2000/car for supercharger access. If 50% is used to fund the construction and 50% to pay for lifetime maintenance and electricity for the superchargers for that car, we would have easy coverage.

For 2014 with an estimate of 40,000 cars, even if only 20,000 opted for the supercharger option we would have $20 million for construction which would pay for between 70 and 140 superchargers, based on whether the station has solar panels or not. How often would an average Tesla use a supercharger? 4 times a year? That is 40 charges in 10 years. The other $1000 seems sufficient to cover the electricity (10$/charge * 40 = $400) for the lifetime of the car and any maintenance on the superchargers.

Disclosure: I am long TSLA, AAPL, OTCPK:NSANY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I plan on taking partial profits in Tesla at $200 and add more if it hits $100.

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