Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Buy Tesla Motors Inc (TSLA) on the Dip?

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.

Tesla Motors Inc (NASDAQ:TSLA)

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.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.