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Tesla Motors Inc (TSLA): Priced for Perfection

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The current market value of Tesla Motors Inc (NASDAQ:TSLA) is $15.56 billion. At this level, Tesla’s market cap is a little less than a quarter of Ford Motor Company (NYSE:F)’s market value or about a quarter of General Motors Company (NYSE:GM)’s market value. Even though last quarter was Tesla’s first profitable quarter (and even that came thanks to selling certain tax allowances), the company is already priced for perfection and beyond. How much would Tesla Motors Inc (NASDAQ:TSLA) have to grow in order to justify today’s share price? Let’s find out.

Tesla Motors Inc (NASDAQ:TSLA)

Revenue and income potential

This year, Tesla Motors Inc (NASDAQ:TSLA) is expected to sell 20,000 Model S cars, most of which will be the high-end models with large battery packages. If the average car price is $80,000, this gives us $1.6 billion in revenue. Given the company’s gross margin of 17% last quarter, this gives us a gross profit figure of $272 million. For most car companies, operating margins are roughly half of gross margins, which would give the company operating income of $136 million. With additional revenue such as tax allowance sales and part sales to companies like Toyota, the company could earn somewhere between $150 and $200 million with the sale of 20,000 cars this year.

How about later on in the future?

In the longer term future, Tesla Motors Inc (NASDAQ:TSLA) is expected to ramp up production, become more efficient at building cars, take better advantage of economies of scale and become more profitable. It is said that Tesla Motors Inc (NASDAQ:TSLA) will be able to double its production every year for the next 5-6 years. In the later years, cheaper cars will join the mix and margins will suffer a little bit, but the efficiency gains I mentioned above will offset some of that.

Let’s say Tesla was able to double its production every year between now and 2017. It would be building 20,000 cars in 2013, 40,000 cars in 2014, 80,000 cars in 2015, 160,000 cars in 2016 and 320,000 cars in 2017. This sounds like a stretch goal, right? Well Tesla Motors Inc (NASDAQ:TSLA) is already priced as if it accomplished all this, and more.

Let’s say that by 2017, Tesla is selling 320,000 cars per year. In order for the company to sell this many cars, it would have to move from being a niche-player to “mainstream.” The company would have to spend loads of money on marketing and building a network of dealerships just like every other car company does. This would definitely eat into Tesla’s profit margins. After all, selling 20,000 cars and selling 320,000 cars take different approaches. Besides, by the time Tesla reaches such a high capacity, its employees will start unionizing just like they did in every car company. Keep in mind that Tesla’s operations are located in California, a strongly pro-union state.

So, what would Tesla’s 320,000 cars look like? Let’s go by hypothetical figures. Tesla could probably sell about 20,000 of the high end cars that cost $80,000 each. Then it could sell about 30,000 cars that cost around $65,000 each. Next, we would be looking at about 50,000 cars at $50,000 price range. The rest of the cars sold (220,000) would be cheaper cars. Elon Musk said that they would start selling $40,000 cars by mid-decade, and if Tesla were to reach a volume as high as 320,000 cars per year, the great majority of the cars sold would be cheaper cars since most people in the world still aren’t rich enough to afford cars that cost nearly six figures.

In this hypothetical situation, Tesla’s total revenue would be $14.85 billion. Higher-end cars would have gross margins closer to 25% (as we see in the luxury segment) and the lower-end cars would have gross margins closer to 17-18%. If we assign 25% gross margin to $80,000 cars, 22% gross margin to $65,000 cars, 20% gross margin to $50,000 cars and 18% gross margin to $40,000 cars (these numbers are pretty comparable in the industry), the company’s total gross profit would be $2.83 billion.

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