Tesla Motors’ (NYSE:TSLA) stock price has increased by more than 60% in the last four months (since December of last year) and crossed $300 recently. The current market price is more than 100% higher than our price estimate of $138 for Tesla. We base our valuation on the discounted cash flow method and given the huge amount of “future growth” factored into Tesla’s price, our estimates of rapid growth in Model 3’s market share do not match up to the large market expectations. According to our estimates, Model 3 accounts for more than 50% of Tesla’s valuation and is likely to generate more than 80% of the company’s revenues by the end of our forecast period.
The success of Model 3 in terms of demand, and more importantly Tesla’s ability to produce vehicles to meet this overwhelming demand, is a key driver for the company’s valuation.
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We expect Model 3 to grow its market share in the EV/HEV segment from less than 2% in 2017 to nearly 22% by the end of our forecast period. If this market share increases at a faster pace and crosses 24% by the end of our forecast period, our price estimate for Tesla can cross $300.
While the company has received an overwhelming number of pre-orders for Model 3, indicating its popularity, there are concerns around its production ability. The company has rarely been able to meet its production targets, which have not been very high so far. In the past two years, the company has targeted 35,000 and 55,000 units for the full year, but fallen short of both targets. In 2016, it targeted 80,000-90,000 units but delivered 76,230 vehicles, again falling short of its goal. A 24% market share of the EV segment by 2023, translates to around 1.5 million vehicles. (We estimate EV/HEV’s to account for around 6% of the total 106 million passenger vehicle market). This is a huge target to meet given that the company has not yet delivered even 100,000 vehicles in a year. Tesla needs huge capital investment to increase its production capacity to meet these aggressive targets. It will need to raise capital for these investments and this increases the risk of Tesla’s bankruptcy if things don’t go right. Further, there are also concerns around whether Tesla can build a profitable “mass market” car, given the high battery costs. While there are no accurate estimates around the battery costs of a Tesla car, we estimate that currently the company spends $52,500 to build its car and nearly 30% of these costs are towards the battery. A significant cost reduction is critical for the company to make Model 3 profitable.
Tesla’s current market price factors in a huge amount of future growth. While the success of Model 3 is likely to bring in this growth, the company faces several challenges in the form of increased interest costs to fund additional capital, operational issues, and cost reduction to make the model profitable.