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TESLA: David amidst the Goliaths?

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December 29, 2013 – Comments (4)

Tesla Motors, the electric-car maker has been under constant scrutiny especially after the stock exploded over the last year providing a return of 500 % approximately. The growth has been fuelled by a bag of positive reviews about the organisation, starting from introduction of new products to a change in the financial status of the organisation. On the financial front the changes have been mainly three:

·         Rising Revenues

·         Declining Loses

·         Repayment of Debt Obligations

Tesla has been a company like no other in the motor industry. It is a technological giant in industry which is otherwise dominated by capital-intensive business. With an Oligopolistic setup, there are hardly any new entrants in the sector. Tesla happens to be the David amidst the Goliath.

The market value of the organisation, rose up to $20 billion a few months back. Any change which focuses on reducing the consumption of fossil fuels, leads to a huge profitable outlook for Tesla. The question that arise though is, whether the current value of the stock is sustainable. Tesla, despite much lower sales, has eclipsed much bigger car manufacturing companies like Suzuki, Mazda and Fiat in terms of market value. The question stays on though, is this growth sustainable or will it mellow down and the current market price shows an over valuation of Tesla.

As I write this, Model S by Tesla Motors has been cleared by the NHTSA (National Highway Traffic Safety Administration) to retain its 5-star rating for crashworthiness (the highest rating).  The model which happens to be a success in the sedan market, was under scrutiny for after fires in Tennessee and Washington. The review of the German Federal Motor transport Authority is awaited though.

VALUATION OF TESLA

Revenue Expectations: It is imperative for Tesla to increase its revenue in order to sustain the expectations of the investors. The good news here is in the current year, it has already clocked revenues of $1398 million in the first 9 months a substantial surge from last year values of $106 million. Sustaining this manifold increase will become difficult as the company continues to become larger. The company should not be considered as a technological company but an automobile manufacturer as the target customers will increase drastically then.

Profitability: The Company reported a loss of $57.5 million in the first 3 quarters of the current year. The pre-tax operating margin happens to be a negative 8%. The fact however remains that the organisation has recent spent $163 million over the same period on R&D. The benefits of the same will be obtained over a minimum of 3-4 year period.

As per my estimates, Tesla is expected to generate operating profit of $10 billion by the end of year 2023 with revenues of almost $ 83 billion. This will place Tesla in the ranks of Hyundai and Peugeot currently.

RISK EXPOSURE FOR TESLA

Business risk: Tesla, is highly dependent on the macro economic factors surrounding it. The organisation draws strength from rising fuel prices and its scarcity. Factors like inflation and the economy have a direct bearing on the organisation.  Moreover, to add to it is the emergence of other players in the industry. The competition for the electric car market is bound to increase in the near future as more established players will venture into this territory, thanks to the Tesla’s success.

Geographic risk: the organisation will face substantial country risk, especially as the growth driver in the future is expected from the emerging economies. In these economies though the foray and acceptance of electric cars is going to take quite some time. In the mature market competition is stiff and the company owned dealership network is new to the sector and may raise substantial challenges. Already certain states in United States do not permit company ownership of showrooms and are preventing Tesla from setting up shop.

Truncation risk: The returns and the market capitalisation of Tesla has experienced a phenomenal growth over the last few years. The true test though les ahead. It is still a young company, with a huge operating loss. Any small shift may bring about a demise to this spectacular growth story. It is hence imperative that investors are all the more cautious while venturing in it.

As per my valuation the stock is valued at $100.44 compared to its current market price of $151. It may seem pessimistic, but given the high margins Tesla operates at, sustaining the growth rate will be difficult and soon the numbers will catch up. For a company already into losses, a market cap of $20 billion seems extremely high. While investors and fund managers are looking for an opportunity to invest in the organisation, my question stands: “is it really worth $20 billion?”

The organisation hasn’t yet experienced the test of time. As more mature players will feel the threat they may enter into a price war, come up with substitutes. While the electric car market is poised to spice up and grow in the future, will it be sustainable. Will other options like hybrid cars using hydrogen or other gases, take up the electric car market. To add to it is the infrastructure investment which is required to set up shop in the emerging economies. Meeting these rising costs and providing an electric car at an affordable rate (using large scale economies) is yet to be seen.

4 Comments – Post Your Own

#1) On December 29, 2013 at 6:31 PM, jiltin (22.22) wrote:

My favorite stocks. However, valuation at $100 is too low at current level. 

TESLA is an innovation (patented) in electric vehicle market, protected by patent law for 20 years.

Economy size cars are introduced, you will see the real competition.

The only car which is really competing (in terms of cars sale) is LEAF, but does not scale to long drive .

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#2) On December 30, 2013 at 10:34 AM, MKArch (99.71) wrote:

You are missing the biggest risk of all in your business risk summary in "human nature". Even though long trips are infrequent most people will not want to give up the ability they have enjoyed forever and pay more to boot. Even if there were a nationwide fast charge network the 30 minute wait is not going to be popular and if there ever was widespread adoption of the cars the cueing lines at the charging stations would be a nightmare. Add to this you have to remember to plug in every night and deal with a dangerous and unsightly extension cord across your yard if you don't have a garage you actually park in. This is assuming you actually have an exterior outlet to plug into. Unfortunately a large part of the population in what should be Tesla's most promising market in city dwellers, don't have access to an exterior electrical outlet. To top it off you have to pay top dollar to get less convenience than you already enjoy. Once you get past the well off greenie crowd looking to show off the hottest new eco-bling you're going to have a hard time convincing the mass market to pay more money for less convenience just to "save the planet".

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#3) On January 02, 2014 at 6:50 PM, jiltin (22.22) wrote:

MKarch, You are right on both TESLA and LEAF limited to cities and local commute. They are not designed for long distance. TESLA has the longest possible as of now. 

All these disadvantages are acceptable when the buyer sees his bottom line, expenditure/month. 

In the case of LEAF, the economics works out very well with 60 miles of up and down traffic. I spend $400 for gasoline everymonth and travel 60 miles daily. If I lease LEAF, the total expenditure is 300/month. I prefer leasing it as the technology is improving. If TESLA comes to affordable 40k price range, I would happily switch to TESLA which is more reliable than LEAF.

I live in san jose areas, heavy commute locations. Above all, they are allowed drive thro carpool lanes single person.  

Two years before, I used to see one or two electric cars. Nowadays, I notice minimum 5 TESLAs on the road and more than 10+ LEAFs. 

Soon electric cars will rule out the gas cars as technology improves day by day. It may take 10+ years to achieve.

Being a leader in electric car technology, I would prefer Tesla as my long term choice. 

 

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#4) On January 03, 2014 at 11:27 AM, MKArch (99.71) wrote:

jiltin,

 

I don't doubt there could be an economic incentive for someone with a long commute. Did you include additional electric utility charges in the $300/ month you cite? There's certainly a niche for the car however I doubt it's suitable for the mass market. I'm in the Chanos camp on China and the commodity super cycle. If he's right and I'm confident he his even the long commute economic argument is going to fall apart for Tesla. If John Peterson is right about the batteries Tesla's costs are going to sky rocket if they do get to a significant market share. Great engineering  but impracticle for mass market IMO.

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