Last month, my colleague Sean Williams laid out the bear case for Tesla Motors Inc (NASDAQ:TSLA). In the article, he argues that as good as Tesla's Q2 earnings results were, they couldn't possibly justify Tesla Motors Inc (NASDAQ:TSLA)'s valuation at nearly $20 billion.
Sean points out that this implies that Tesla Motors Inc (NASDAQ:TSLA) is worth around $850,000 for each of the 21,000 cars it will produce in 2013. He also notes that even if Tesla boosts its production by a factor of 20, it would still be twice as expensive as Toyota Motor Corporation (ADR) (NYSE:TM) on a value per car basis!
Yet a 20-fold jump in production is just what Tesla bulls expect. In fact, they expect it to happen fairly soon: not next year, but before the end of the decade. The Tesla factory in California has a nominal capacity of 500,000 vehicles per year, and Tesla CEO Elon Musk expects to use all that capacity and more (eventually). If Tesla Motors Inc (NASDAQ:TSLA) manages to grow into its current production capacity by 2018, would that justify its $20 billion market cap? Or would the company need to keep growing well beyond that level to justify buying the stock today?
Tesla 2018: the high-end Obviously, there is no guarantee that Tesla will meet the lofty goals investors are setting. The company has missed a variety of production milestones in the past, although it has always rallied to come through in the end. As it continues to grow, there will be more headwinds, such as securing an adequate supply of batteries. However, let's assume that Tesla surmounts these technical challenges, so that demand becomes the limiting factor.
Tesla Motors Inc (NASDAQ:TSLA) believes that there is enough demand in the market for it to ramp up Model S production to a pace of 40,000 units per year by the end of 2014. As it expands its Supercharger network and adds more retail stores and service centers, Tesla expects incremental demand beyond that level.
The addition of the Model X crossover in late 2014 will spark additional demand, although it will probably also cannibalize Model S demand to some extent. In any case, it seems challenging for Tesla Motors Inc (NASDAQ:TSLA) to sell more than 100,000 high-end (i.e. priced above $70,000) luxury vehicles per year any time soon. Porsche, a well-established high-end luxury automaker, sold just 141,075 vehicles last year.
Tesla 2018: the low-end As my colleague -- and Tesla bull -- Daniel Sparks wrote last month, the real key to Tesla's growth is the coming of a lower-priced model. which could go into mass production by 2017. On Tesla's most recent earnings call, CEO Elon Musk said he saw a "clear path" to producing a $35,000 car with a range of at least 200 miles.