Raising Tesla’s Estimates Following Positive Sales Guidance

by Trefis Team
Tesla Motors
Rate   |   votes   |   Share

Tesla Motors (NYSE:TSLA) beat the market expectations yet again in its recent earnings announcement. The company announced a profit of 20 cents a share (non-GAAP) on revenue of $552 million. What really stood out was the automaker’s guidance of selling 40,000 Model S cars on an annualized basis by the end of 2014. The automaker has only begun to expand internationally, and we estimate selling those many number of cars within the given time frame is pretty impressive.

After the second quarter earnings, we have revised our price estimate for Tesla to $84 per share

Following the guidance given out by Tesla for its Model S sales in 2014, we have upped our long term forecasts for the number of the Model S sales. If Tesla is able sell 40,000 cars annually by 2014, we believe it can sell as many as 100,000 cars annually in the subsequent years when it has a greater international presence. Our revised price estimate is nearly 20% higher and is primarily attributed to greater optimism regarding Model S sales going forward.

It takes time to understand the local market, tweak your products accordingly and raise the production. For example, in China, the company is focusing on making the rear seat more comfortable since it is a norm there to be driven around by a chauffeur. Then there is the issue of converting the left hand drives to right hand drives for the international markets. All of these act as bottlenecks and prevent the sales from rising at a pace which would impact the real demand.

The Mercedes S-Class, which is more expensive than the Model S, sold about 65,000 units last year. In the long term, that figure could easily rise to 80-90,000 given the pace at which China’s appetite for luxury market is growing. We believe the Model S can match the sales of the S-Class. In fact, the Model S is more likely to compete with the E-Class, whose price starts from $52,000 in the U.S. About 310,000 E-Class vehicles were sold globally. Thus, assuming annual sales of 90-100,000 for the Model S in the long run doesn’t look far fetched.

Why Is Our Price Estimate So Low?

Even though we have raised our valuation by 20%, it is still 40-45% lower than the market price. The market is betting on Tesla to be the next Apple.

Although we think Tesla is a great company making great products, one cannot underestimate the competition. It’s hard to think of a time in the auto industry when a single company dominated the entire market as Apple has done in the smartphone market.

It also makes sense to understand the dynamics of each industry in order to fully appreciate what each incremental sale adds to the company’s valuation. Apple’s products have high gross margins. Thus, a greater proportion of additional smartphone sales will go to the bottom line.

The auto industry does not work this way. It is typically a high revenue, low margin industry. In fact, Tesla has a long term gross margin target of 25%. Thus, less than a fourth of the revenues generated from the incremental sales will go to the bottom line. At the moment, the  profits are so small that selling a few more cars can boost net income meaningfully which gives the impression that the company has smashed all estimates. As profits continue to grow, this will not happen.

We do not think our forecasts are conservative. In the long run, we estimate that the automaker will sell about 400,000 cars annually. This includes the sales of Model S, Model X, the Gen III and the Roadster combined. Due to a high degree of uncertainty involved in such forecasts, we have take a discount rate of 14%. If you feel like the company is less risky, you can modify the discount rate. For example, changing it to 12% yields a price of about $115, or about 40% higher than the current valuation.

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

Rate   |   votes   |   Share


Name (Required)
Email (Required, but never displayed)
Tesla Motors Logo
  • commented 4 years ago
  • tags: TSLA F GM TM DAI HMC
  • I think that your estimate of 84.84 is totally wrong, and has been wrong so far, the market is looking at Tesla as the next Apple because it is the next Apple. When Apple came forward with their smart phone, and laptops, people were mesmerized, and excited because they had never seen anything like this. I believe that when Tesla starts advertising on TV like other car manufacturers are doing every day, consumers will have the very same reaction and they will learn that there is another viable transportation that they can own, and they don't have to put gas in it because Tesla's automobiles don't have any tailpipe, no engine to pollute our air..
    I know you will say that other electric vehicles have been on the market for some time now, but not like this one. Consumers have looked at the Chevy volt, and said nope, it won't get me to work and back, and if I want to go to a movie after work with my family I would have to charge it before I drove away again, not enough of time to do that, and if I took a chance to go without charging it, I would be worrying the whole time I was in the movie about getting stranded with a car that's out of power. The leaf is even worse of a worry, not enough of distance driving on a single charge.
    We now have the Tesla Model S, the charge will take an owner 270 miles on a single charge, and when you do charge the battery, it will charge up to 80% full in 30 minutes, no other manufacturer has even come close to that, and if your lucky enough to have a Tesla Supercharger in your neighborhood, the charge is free, and for as long as you own the automible. Who offers that? Free mileage, Free driving, The answer is only Tesla, that's why the stock is doing so well, people or consumers can't wait for the Model X or Gen 3 to come out, there hoping that Tesla will come out earlier than Tesla said for these new models. These models will make them an all around town vehicle when the Superchargers are installed everywhere across the country. Don't forget these Superchargers get their energy from the Sun, making these auto's a fully green car, using no power utility to charge your vehicle.
    With Gasoline prices going up almost every day, America does not have an automobile that can travel on electric for any decent distance, but we desperately need that right now.
    We have the opportunity to get ourselves off of foreign oil, help our citizens to save money, and the bonus would be to save our environment/planet with cleaner air. Please Support Tesla in your next valuation.