Fans see a car from Silicon Valley far closer to the dream cars of Maranello, Munich or Newport Pagnell than to anything from Detroit.
Detractors contend that any vehicle requiring an hour to recharge is hopelessly impractical and will never attract the mass market, especially when you take into account the high manufacturing cost of electric vehicles.
But perhaps the problems of "range anxiety" have been a little overstated. According to a study by Columbia University,98% of all single-trip journeys are less than 50 miles in length, and trips over 70 miles account for just 1% of all single-trip journeys. The Tesla Model S has a range of up to 300 miles. Drivers making long journeys will usually take a break of an hour or so to eat and freshen up, ample time to recharge (for free!) using Tesla’s ever-growing supercharger network. For the vast majority of the time, the Tesla Motors Inc (NASDAQ:TSLA) will recharge at home overnight – eliminating the tiresome trip to refill with fuel every week or so. Far from being an inconvenience, the real ownership experience is actually an improvement over that of running a car based on liquid fuel.
Tesla has a market capitalization of $3.9 billion, loses money, and has revenue of $413 million. It has a price to sales ratio of 10.7. For an early stage internet stock with a bright future ahead this would be acceptable. But for a low-margin automotive manufacturer this is somewhat troublesome. By comparison Ford Motor Company (NYSE:F) has a P/S ratio of 0.38 and General Motors Company (NYSE:GM) has a ratio of 0.25. Is there more to this story?
Tesla Motors Inc (NASDAQ:TSLA) is currently just starting a massive ramp up in sales. Revenue in the 4thquarter, on sales of 2,400 cars, was up 500% from that of the previous quarter. If expected production targets of 20,000 units are reached in 2013, this would equate to sales of $1.7 billion at an average selling price of $85,000. Musk estimates world demand at about 40,000 vehicles per year. If we assume that the company reaches that production target in 2014 it would result in a turnover of $3.4 billion for model S sales. The Model X will come on stream next year, if that produces similar revenue to the model S, we should reach revenues of $6.8 billion. In another year or so, a mass market car at $35,000 selling 100,000 units would add another $3.5 billion for a total turnover of $10.3 billion.
So what would that mean for the share price? Keeping things simple, a net margin of 10% and a P/E of 10 would give a market cap of $10.3 billion, or a share price of around $91 as compared to $38 at the time of writing.
At that point, Tesla would have about a fifth of the market capitalization of Ford Motor Company (NYSE:F). So if you are a real believer, you may see further room for significant growth into the future.
It is clear that if things work out, this stock could produce very good returns for the investor. But these numbers look ambitious and this is a very big IF.
The first big question is, ‘Can you believe in Elon Musk?’.
Let’s look at some of the things he said in a recent lecture at Oxford.
"It was clear that the internet was going to be something important for the future ... it would fundamentally change the nature of humanity ... would be like humanity gaining a nervous system ... I wanted to be part of building that."
"I wanted to pursue the two other things I thought that would most affect the future of humanity ... sustainable energy; arguably the most pressing problem of the 20 century ... the other one was the extension of life beyond earth."
So you may think, oh yeah, this guy is just a delusional idiot – he thinks he can single-handedly change the world.
Until, that is, you look at the facts.
Hewaspart of building the internet, creating two successful internet companies, the second of which – PayPal – has played a major part in revolutionizing online commerce.
And what about "the extension of life beyond earth?"
Musk’s SpaceX company has been delivering payloads to the International Space Station and has contracts in place with NASA for delivering astronauts to orbit. And his plans for creating a self-sustaining colony on Mars are already in the early stages of execution.
As for "sustainable energy," his company SolarCity is a leader in the field. Of course, Tesla Motors Inc (NASDAQ:TSLA) itself aims to make a major contribution by eliminating the need for cars to burn hydrocarbons.
So this is a guy that not only thinks big, but also delivers big. Perhaps his record of flawless execution at Tesla is no fluke.
The next big question is ‘How can a car company produce the sort of margins needed to justify the valuation?’
Here's an analogy: my background is in software. I always avoided selling hardware because "everybody knows" that hardware is a low-margin, high-maintenance business – a mug’s game. And then this company called Apple came along...
I have heard the Model S described as "Aston Martin on the outside – Apple on the inside." Steve Jobs used a phrase about the positioning of his products: he wanted to ‘impute value’. By selling through classy stores in fashionable retail locations, and by pursuing an absolute determination to focus on quality and service Tesla is imputing value. And that value will be realized in the margin Tesla will make on its sales.