After blowing past the all-important $40 per share mark, many investors are wondering what the future holds for Silicon Valley’s automaker, Tesla Motors Inc (NASDAQ:TSLA). The announcement that drove Tesla shares was the beating of deliveries expectations with the number of Model S sedans delivered reaching 4,750 units versus the expected 4,500 units. This figure, combined with the announcement of profitability on both a GAAP and non-GAAP basis, helped to boost investor confidence in the future of Tesla Motors Inc (NASDAQ:TSLA). We all know that the automaker still faces major challenges, challenges that could force the developing company into bankruptcy if serious enough. But, while acknowledging the risks inherent in an investment in any start-up, we will take a look at what Tesla’s true potential could be should the company survive and grow as expected.
Stage one: Luxury automaker
While the Tesla Model S is widely agreed to be a very well performing car, most also realize it is not for those with shallow pockets. Granted, many upper middle class people can afford this car by financing it and factoring in energy and maintenance savings, but the way Tesla Motors Inc (NASDAQ:TSLA) built the car clearly shows the automaker’s intent to compete in the luxury market.
Here, Tesla Motors Inc (NASDAQ:TSLA) will take on offerings by such companies as Volkswagen Group’s (NASDAQOTH:VLKAY.PK) Porsche, Daimler AG’s (NASDAQOTH:DDAIF.PK) Mercedes-Benz, and independent BMW. At this stage, these automakers do not see Tesla as much of a threat. Daimler has even signed agreements to source parts from Tesla Motors Inc (NASDAQ:TSLA) to build its own line of electric cars including an electric Smart Fortwo and the soon to launch electric version of the Mercedes B-Class. For a while, Daimler even owned about ten percent of Tesla but has since sold the majority of its Tesla stake to a Middle Eastern investment fund.
Unlike Tesla, Daimler is on solid financial ground as far as automakers go and has a track record of generating positive earnings. While Tesla is seen as a growth stock by its investors, Daimler is often used as an income stock for its solid dividend of 5.3 percent. Nonetheless, Tesla is going after Mercedes-Benz market share with its Model S, similar to the E-Class, and the upcoming Gen III sedan, similar to the C-Class. But Daimler remains content to let Tesla grow. Right now, Daimler is continuing to develop its own hybrid line while sourcing Tesla parts for its EV offerings. Additionally, Daimler, as well as Volkswagen and BMW, are developing diesel engines for use in passenger cars, both the United States and in Europe.
At Porsche, the company is building a line of gasoline-electric hybrid vehicles that includes the Cayenne SUV and the Panamera sports sedan. Tesla seems to have these two sports hybrids in its sights with the Model S competing with the Panamera and the Model X competing with the Cayenne. Comparing the stats of the Model S versus the Panamera, the Model S can clearly hold its own and even wins many categories when similarly priced trim levels are compared. For the Cayenne, it remains to be seen how the Model X stacks up against it in performance tests.
For those with a need to blow away their neighbor’s hybrid, Edmunds is reporting that Porsche is creating a hybrid 918 Spyder that can do zero to sixty miles per hour in under three seconds. At $845,000, even a Model S Performance looks cheap by comparison. As much as I am a fan of the Model S, it is pretty clear this Spyder would dominate the Model S in everything performance. But Tesla isn’t giving up the supercar realm. The automaker plans to bring back a new version of the Tesla Roadster around the same time as it releases the Gen III sedan. More excitingly, Tesla CEO Elon Musk has indicated his intention to bring a supercar to market that can compete with Ferraris and Lamborghinis.
So should Volkswagen feel threatened by Tesla going after Porsche vehicles? Probably not, at least for now. Porsche is only one division of the Volkswagen Group which now includes Volkswagen itself, as well as Porsche, Audi, Bentley, Bugatti, and Lamborghini. Despite the prestige behind the names of Volkswagen’s luxury brands, the majority of Volkswagen Group’s sales come from the lower price segments where volume is key. If anything, Volkswagen Group is growing and hoping to become the world’s largest automaker within the next several years, a trend that should increase earnings as sales grow and greater economies of scale are realized.
With respect to BMW, the BMW 5 Series Luxury/ Sports sedan is a frequent comparison to the Tesla Model S. While 5 Series sedans are sold in numbers that exceed Tesla’s current production capacity, the start-up automaker may have already picked off some 5 Series buyers with its electric Model S.
But Musk is labeling the BMW 3 Series as the target for the Tesla Gen III sedan. While there are many other capable cars in the $30,000 range, the 3 Series is the target for the competitors that seek to unseat the king. But none of these currently offered cars are electric. By introducing the Gen III sedan, Tesla is looking to shake up the $30-$40,000 sports sedan segment and targeting the 3 Series is the best way to start. But without any performance figures on the Gen III sedan, we will just have to wait to see how it stacks up against the 3 Series.
It is difficult to predict a value for a Tesla Motors that has become a major competitor in the luxury segment by looking at the market capitalizations of Daimler, Volkswagen, and BMW. In the case of Daimler, Mercedes-Benz is only part of the larger company so it is tough to get a feel for what value the market would assign to an independent Mercedes-Benz. Volkswagen’s Porsche may provide better insight since a small fraction of Porsche shares are not owned by Volkswagen and are still publicly traded. At the close of trading on Apr. 8, 2013, Porsche was valued at roughly US$11.3 billion (8.67 billion euros). Based on the current 114.5 million shares outstanding, a market cap of Porsche’s size would give Tesla a share price of nearly $100 per share. However, along the way share dilution will be likely and given a ten percent increase in shares outstanding, a Tesla with Porsche’s market cap would still be worth about $90 per share. But Tesla will want to grow to be more than Porsche and plans to move in on BMW’s territory.
To use BMW as a predictor, one needs to remember the diverse company BMW has become in the luxury segment. Building everything from sedans, to sports cars, to motorcycles, to SUVs and roadsters, it would take Tesla several years to reach BMW’s size, even with everything going according to plan. But this article is about getting a feel for Tesla’s potential value should it survive and fully expand.
Looking at BMW, we see a company in total worth about US$55 billion (43 billion euros) based on the last price during trading on Apr. 8, 2013. Based on the current 114.5 million shares outstanding, a market cap of BMW’s size would mean a share price of $480 per share for Tesla. But in reality, even if Tesla grows to BMW’s size there will likely be additional share dilution from option exercises or additional capital raises. With a share count ten percent greater than the current amount, shares would still be worth around $440 per share.
Tesla of the future
Clearly, Tesla Motors wants to be more than it is today. Just a few years ago many said the company could never mass produce a car. With the beginning of Model S production, Tesla is in expansion mode but still faces the headwinds associated with any start-up. But looking at Tesla as what it could become shows that, even as only a luxury automaker; Tesla shares could have significant upside. While the estimates here would satisfy most Tesla shareholders now, Tesla plans to expand beyond the luxury segment and into the affordable mass market. This will take a longer time than securing a role in the luxury market and could possibly take more than a decade. With this article primarily addressing Tesla as a luxury automaker, the second part of the series will address Tesla’s potential should it survive and move into the sub $30,000 range
The article How High Can Tesla Fly? Part One: Luxury Automaker originally appeared on Fool.com and is written by Alexander MacLennan.
