Weekly Notes: Tesla Shares Down On Low Oil Prices

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Although Tesla Motors (NYSE:TSLA) announced a new model late last week, its shares were down by as much as 14% during the week. [1] Previously, Chief Product Architect Elon Musk has said that the biggest threat to the company is not so much other electric car companies as the internal combustion engine(ICE) remaining popular. The question is whether customers are buying Tesla’s cars because they are cheaper to drive than ICE driven cars or because of their luxury appeal. In case of the former, oil prices remaining low would definitely erode Tesla’s advantage. However, attributing the decline in Tesla’s shares entirely to the slump in oil prices would entail making the claim that the slump isn’t temporary, which is most likely not the case. Of course, the market was also down this past week, and that will also have had something to do with the decline in Tesla’s stock price as they are highly valued but, in our view, the majority of the decline can only be explained by investor disappointment in the newly announced Tesla D Model.

The new model, which was announced late last week, has better acceleration, better safety features and more self-driving capability than Tesla’s Model S. The car, however, will be available at a price range starting from $89,000 and finishing at $120,000, placing it well out of the reach of the American auto consumer. In order to justify its very high price multiple, the company will have to release a car that is viable as a mass market model, meaning it will have to release a car in the price range of $30,000 to $40,000. Tesla is said to be planning a model in that price range called the Model E, but it won’t be available until 2017. [2] Tesla’s $5 billion gigafactory is perhaps the strongest piece of evidence we have so far testifying to the company’s seriousness about building a mass market car. However, the gigafactory could also be a hedge for the company, ensuring that even if the Tesla brand name doesn’t take off, the company can still cover its costs by selling lithium ion batteries to other alternative car makers and any other consumers of lithium ion batteries.

Currently, our valuation of $150 (market cap of $18.5 billion) for the company is 33% below the current market price of $226 (market cap of $27.9 billion). We expect Tesla to report revenue of around $4 billion and operating income of $700 million for calendar year 2014. We forecast non-GAAP diluted EPS of $0.79, which is lower than the market consensus of $1.01 (Financial Times).

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Notes:
  1. Tesla Model D: Elon Musk’s new electric car is company’s most powerful yet, Independent, October 2014 []
  2. $30,000 Tesla “Model E” Will Be the Company’s Most Affordable Car, TechnoBuffalo, July 2014 []