In an environment of volatility, it is usually the high beta stocks (a stock rating that determines the price movement of a stock against a benchmark index, like the S&P 500) that decline the most in valuation.
In the trading session at the end of May, Tesla Motors Inc (NASDAQ:TSLA) got pummeled and declined by 6.85%. The stock currently trades at around an $11.6 billion market capitalization. The company’s valuation is starting to be tested by the broader market.
Defining the value of Tesla’s business
Elon Musk believes that the company will report a 20% gross margin even without fuel credits. It excludes subsidies but relies partially on tax credits provided to consumers. That being the case, the company will be selling 21,000 units of the Tesla Model S, which is currently sold at $77,400. Therefore the company will generate $1.625 billion in revenue by the end of the year.
Ford Motor Company (NYSE:F), General Motors Company (NYSE:GM), and Honda Motor Co Ltd (ADR) (NYSE:HMC) all operate within the 3.2% to 5% net profit margin range. But because Tesla Motors Inc (NASDAQ:TSLA) business model is aimed at a more affluent customer base, the company could eventually generate higher net profit margins as a result of the higher average selling price.
Analysts on a consensus basis anticipate that the company will generate a net profit margin of 5.16% by 2014. However, these net profit margins could improve as the company ramps up the production of its vehicles. The company plans to increase the size of its manufacturing facilities by expending an additional $200 million on its manufacturing capabilities.
Sustainable business strategy
In its latest quarterly earnings announcement, the company was able to reduce the build times on its cars by 40%, thus reducing labor costs by 40%. Labor costs are a large component in the cost of manufacturing. It is highly likely that the company will continue to improve the efficiency of its manufacturing process, which will in turn increase the amount of profit generated.
The company also plans to expand the size of its manufacturing and store footprint. This business strategy is likely to be hugely successful. The reasoning is that Tesla Motors Inc (NASDAQ:TSLA) is selling its cars in showrooms around the country in prestigious mall locations, making them easily accessible; I actually went to one of Tesla Motors showrooms at the Scottsdale Fashion Square Mall. The retail strategy is proving effective as malls are known to attract wealthy consumers with deeper pockets. According toMacerich Co (NYSE:MAC), the average mall customer has an average household income of $73,000. So it is highly likely that the showroom concept Tesla Motors is currently pursuing is going to be effective at generating sales.
Tesla Motors product strategy
Currently Tesla Motors is pulling ahead of the competition, which includes Ford and GM. The Tesla Model S is a far superior product, offering 208 miles in range per charge. The Ford Focus Electric, by comparison, only has a 76-mile range, though it is also priced at approximately $38,000, which implies that it could potentially attract lower-end electric vehicle customers.