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Is Tesla Motors Inc (TSLA) Valuation Getting out of Hand?

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Tesla Motors Inc (TSLA)When it comes to valuation, Tesla Motors Inc (NASDAQ:TSLA)‘ stock price premium is second to none among auto manufacturers. The company trades at 142 times forward earnings estimates and about 15 times its trailing-12-month revenue. As if the six-month run-up of 188% since Jan. 1 wasn’t enough, the stock has appreciated another 21% on top of that in the last month and a half. When is enough enough?

Tesla runs a lucrative operation
First, the positive. As Tesla Motors Inc (NASDAQ:TSLA) ramps up production, the company’s manufacturing process benefits from greater economies of scale. This, of course, is no surprise — it’s a basic rule of thumb in business. But to what degree will Tesla benefit?

Already, the company has “reduced the hours required to build a car by almost 40% from December to March,” asserts Tesla’s first-quarter letter to shareholders.

Tesla Model S undergoing assembly. Source: Green Car Reports.

This, along with a number of other benefits associated with scale and $68 million in sales (12% of revenue) of its zero-emission vehicle credits, or ZEVs, helped the company double its gross margin from last quarter, to 17%.

In the first quarter, Tesla Motors Inc (NASDAQ:TSLA)’s gross margin of 17.15% outperformed a number of auto manufacturers. Ford Motor Company (NYSE:F) , for instance, reported a gross profit margin of 16.21% during the same period — and that was on sales of about 1.5 million vehicles. To make this comparison fair, however, it’s important to note that Tesla’s core auto business’ gross margin was just 2% in the quarter, according to Morgan Stanley’s Adam Jonas. ZEV credits were a major contributor to the company’s 17% gross margin, says Jonas.

But here is where things get really interesting. In the first-quarter letter to shareholders the company reaffirmed its guidance for a gross margin of 25% by the fourth quarter of 2013, “assuming zero ZEV credit revenue”.

Valuation
Can Tesla Motors Inc (NASDAQ:TSLA)’s improving gross profit margin save the company from the Street’s lofty expectations? Probably not by itself, but it’s definitely a start.

A gross margin of 25% is about 1.46 times the company’s current gross margin of 17.15%. Taking Tesla’s first-quarter gross profit of 96 million and multiplying it by 1.46, Tesla Motors Inc (NASDAQ:TSLA) could earn a gross profit of 140 million every quarter at today’s revenue levels and with a gross profit margin of 25% — that’s 560 million annually. In other words, Tesla trades at 25 times a very conservative estimate of 2014 gross profit. Conservative or not, 25 times 2014 gross profit is a significant premium. Ford Motor Company (NYSE:F) trades at just three times its trailing-12-month gross profit.

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