Tesla’s Model 3 Launch On Schedule: How Critical Is This For The Company’s Valuation?

Tesla Motors (NYSE:TSLA)  announced that its Model 3 vehicle will be unveiled on March 31, 2016, when the company will start accepting reservations for its mass market car. While the price of the car has been confirmed at $35,000, as expected, deliveries of the vehicle will start in late 2017. ^[1]. According to our estimates, more than 30% of Tesla’s valuation is derived from the revenue the Model 3 will generate, once it becomes available in 2017.  Hence, the success of this model is critical for the company. While General Motors will launch its Chevy Bolt, considered to be a direct competitor to Tesla’s model 3 by the end of 2016, Tesla’s ability to succeed in the mass market will be key for its valuation in future.

Nearly 20% Downside To Our Price Estimate If Revenue And Market Share Estimates Are Not Met

From the fiscal year 2017, we expect Tesla to generate revenue of $45,000 per unit of Model 3 sold at the time of launch. This will include revenues recorded due to sale of ZEV credits, earned by the automaker through sale of electric vehicles and those from after sale service. We expect these revenues to increase gradually and reach $50,000 by the end of our forecast period.

If the production of the vehicle is delayed and the company starts generating revenues from this model in 2018 instead of 2017, as planned, there will be a minor downside to our price estimate. However, if the company is unable to meet our revenue growth targets and revenue per vehicle remains stable around $45,000 throughout our forecast period there can be a 10% decline in our price estimate for the company.

There are concerns around Tesla’s ability to succeed in the mass market and to ramp up production to compete in this segment. While the company enjoys brand prestige in the luxury car market, it will have to face established players such as General Motors and Nissan in the low cost electric vehicle market. A report by Bloomberg suggests that Tesla’s quality problems, supply chain issues and production delays might impact its success in the high volume low price segment of the market. ^[2].

We expect Tesla to sell around 50,000 Model 3 vehicles in the launch year and gradually increase this figure to 75,000 by the end of our forecast period, capturing a market share of more than 9% in the EV market.

However, if the company is not able to meet these expectations and the market share grows at a slower rate to around 8.5% at the end of our forecast period, there can be a 10% downside to our price estimate.

While Tesla appears to be on target for production and delivery of Model 3, its ability to scale up production and grow its revenues per vehicle will be more important for the valuation of the company. A slightly delayed launch might not have a significant impact on our price estimate, but inability to create its mark in the mass market while competing with established players such as General Motors would impact its valuation significantly.

See full analysis for Tesla Motors

Understand How a Company’s Products Impact its Stock Price at Trefis

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research

1. Tesla Model 3 Price And Release Date: Reservations Begin March 31, N4BB, February 14, 2016 [↩]
2. Tesla Will Get Trampled  by the Mass Market, Bloomberg View, February 2016 [↩]