Tesla Motors: It Is All About The Future

Our price estimate of $ 170 for  Tesla Motors (NYSE:TSLA) is around 20% lower than the current market price.  We expect 50% of Tesla’s value to come from its  Gen III model and Model X, which are to be launched in September this year.  While Model S, which constitutes more than 40% of our price estimate, is performing in line with our estimates, a large portion of the company’s valuation depends on the success of Gen III and Model X.  Electric vehicles (EV) are a new market and Tesla has ambitious growth plans. It does have a competitive edge in terms of lower battery cost and a supercharger network, but its success will only be achieved through a significant number of milestones in the future.

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EV Market Currently Driven By Government Incentives

In 2013, the EV market constituted about 2% of the total passenger vehicle market. We expect this figure to reach around 6% at the end of our forecast period.

Our forecast of the EV market is in line with Navigant research’s 2013-2020 Electric Vehicle  Market Forecast, since this is a niche market with some uncertainties around its growth. The growth in this market is primarily driven by government incentives.  Norway has the highest number of EV’s registered as a percent of total registered vehicles (33%) ^[1]  This can be attributed to the absence of import tax on EV’s making them a viable alternative.  In countries where these incentives are not provided, high costs of EVs make them less popular.  Even in the U.S., EV cars are more popular in California where huge tax credits are offered.  We expect these government incentives to increase in future with more focus on green vehicles, thus accelerating the growth in the EV market.

Tesla Has Competitive Advantage, But Is The Market Betting Too Much On The Future?

Tesla has strong innovative edge.  Its battery costs are known to be much lower than most of its competitors and its battery performance is roughly 50% better than industry standards.((www.torquenews.com))

Given Tesla’s advantageous position, Gen III’s pricing could be somewhat more competitive and can improve Tesla’s market share.

Tesla’s strong supercharger network is another huge competitive edge. It boasts of 527 supercharger stations with 2983 superchargers.  A 30 minute charge provides 170 miles of range compared to 10 miles in a 30A public charging station.  Tesla claims that after at 30 minute charge, the car has enough range to reach the next charging station. ^[2]. The charging cost is included in the price of the car providing the users a free lifetime supercharging.  No other EV manufacturer has currently replicated Tesla’s supercharger model.  Tesla’s target market of luxury buyers allows it to price the models higher to recover the costs of charging stations.

With increasing government incentives and a focus on low emission vehicles, we expect electric vehicles (EVs) to see tremendous growth. Tesla’s models are eagerly awaited and its technology provides it with a competitive edge.  However, the stock price currently factors a huge growth in future, which is likely to primarily come from its yet to be launched models. Also, its distribution model of selling directly to customers is causing obstacles in several states in the U.S. Whether Tesla will be the success it is projected to be, is yet to be seen.  Tesla’s valuation appears to be a huge bet on this future.

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1. IHS Survey [↩]
2. Tesla website [↩]