In TSLA), I took note of the company's award-winning new
sedan, impressive engineering efforts and prudent fiscal
management. Even the company's most ardent detractors must now
concede thatCEO Elon Musk's vision for a new kind of car company
has been transformed into an impressive reality. Tesla now puts out
vehicles that
Ford (
F
)
,
GM (
GM
)
and many others simply can't match.
But it's important to remember that Tesla has already consumed
billions in start-up capital and has yet to turn thatinvestment
into aprofit . The company's manufacturing plant has had its share
of teething pains and production volumes still remain fairly low by
broader industry standards. To start making the much-raved Model S,
Tesla had to stop making the Roadster. It was too hard to
concentrate company resources on the production of more than one
vehicle.
Now that production has shifted to the Model S, bottlenecks have
limited output, though management hopes to steadily ramp up
production in coming months, eventually hitting a goal of a
combined 30,000 units of the Model S and X by 2014. Based on
current run rates and teething problems, it may be quite hard for
Tesla to reach that goal. Tesla is currently making 200 vehicles
per week, or about 10,000 vehicles per year. Even if the company
can reach its 30,000 annual production target by 2014, that output
is just a tiny fraction of what the major automakers produce.
In fact, investorswill need to wait until 2017, when Tesla
intends to launch its third-generation car, which will have lower
price points in hopes of achieving much higher sales goals. And
that's when we'll find out whether Tesla is a real car company,
worthy of its current $3.5 billionenterprise value , or merely a
niche maker of specialized vehicles that cater to a select few.
After all, by 2017, you can surely expect to see other
impressive electric or hybrid vehicles on themarket that some of
the big players will beoffering . These manufacturers tend to
target a profit of $2,000 to $4,000 per vehicle, so the only way
they can overcome the bigoverhead expenses associated with running
a car company is to generate high volumes. The gross margins are
thin, but the overall profits can be impressive.
Millions of vehicles sold means billions in profits
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For the next five years, though, investors will only be able to
assess Tesla's prowess based on the high-end Model S and Model X.
If the company can produce 30,000 of them annually, as noted above,
then that translates into roughly $2.7 billion in revenue, roughly
$600 million in gross profits and about $250 million in operating
profits. The current $3.5 billion enterprise value is around 14
times that mid-decade operatingcash flow -- which is quite rich for
at least any U.S. automaker (Ford and GM, for instance, trade for
about six times their cash flow.)
Yet here's the problem with that math: It assumes Tesla will be
able to work out all of its production glitches and make all of
those vehicles. It also assumes there will be enough demand for
that annual output. As noted in my previous article, Tesla sold
just 2,300 Roadsters in four years, mostly to wealthy citizens who
wanted to own a unique vehicle. Are there really 30,000 more people
(or 90,000, accounting for three years' worth of output) who
will similarly want to own the company's newer halo cars? Perhaps,
but that's a best-case scenario.
Here comes the competition
In coming quarters, get set to hear a lot about BMW's new "I"
cars, the i3 and i8, which are all-electric vehicles being designed
from a clean sheet of paper. The i3 will be a remarkably frugal
small car, while the i8 is expected to deliver a previously unseen
level of performance -- yes even better than what the Tesla Model S
has tooffer , according to BMW management.
About a year after that, the world's largest automaker -- the
Volkswagen Group -- will be making a similar push for its Audi
brand, known as "eTron." These cars aim to replicate the
performance, style and charisma of Tesla's vehicles. The effort
will eventually extend to the broader VW family of cars, and it's
likely only a matter of time before Mercedes, Jaguar and other
premium brands chase the well-heeled early-adopter auto buyer with
their own all-electric offerings.
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Suffice it to say, by the time Tesla has worked out its
production bugs and works toward output of 30,000 vehicles a year,
competition will be much fiercer. We're talking about companies
with billions of dollars in resources compared to Tesla, which will
have littlecash on hand after the company's $450 million U.S.
Department of Energy (DOE) loan gets paid off. It received the loan
after Congress passed the Advanced Technology Vehicles
Manufacturing Loan Program in 2008, allowing the DOE to oversee the
funding of projects by U.S. automakers to create fuel-efficient
vehicles that meet strict requirements.
Risks to Consider:
As an upside risk, Tesla's head start in terms of engineering
prowess would make it an attractive purchase for a major global
automaker.
Action to Take -->
Shares of Tesla recently zoomed from $28 to $34 after the company
got the DOE to hold off calling in that big loan. Indeed a recent
fresh capital raise underscores the notion that Tesla could undergo
deep financial distress any time soon.
In effect, shares are already pretty richly valued on a
best-case, mid-decade scenario implying little further upside. And
if Tesla hits yet another production glitch, as was the case only
recently, then shares could quickly tumble back to the mid $20s. So
while Tesla is a pioneer in the electric car space, with such an
upside/downside scenario in place, this stock looks a lot more like
a "sell" candidate than anything else.