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How High Can Tesla Motors Inc (TSLA) Fly? Part Two: Mass Market

When Tesla comes to the mass market, it will probably happen in stages as the automaker introduces new models one by one. In this way, Tesla will not spring into Toyota overnight and the entire process of entering the mass market and building a full line-up could easily take more than a decade. But it is worth taking a look at what Tesla hopes to become as part of an ultra-long term horizon on a Tesla investment.

The General and Tesla

Does Tesla want to become General Motors? The Silicon Valley carmaker seems to like the scale of GM and the profits that could be produced. But throughout its history, Tesla has made its image of being the anti-GM. Where GM has aging factories in Detroit, Tesla has the relatively modern former NUMMI facility in Fremont, California. Where GM sells gas guzzling SUVs, Tesla sells all electric passenger cars. And where GM has giant car dealer lots, Tesla has sleek Apple Inc. (NASDAQ:AAPL)-esque stores inside shopping malls. In short, Tesla wants the scale of GM without the other things associated with the mega manufacturer.

As of now, GM and Tesla couldn’t be more different in their valuations. GM is valued at 9.4 times earnings suggesting investors are not willing to pay as much for it as they are for Toyota and Honda Motor Co Ltd (ADR) (NYSE:HMC) which trade at 21.6 times and 18.7 times respectively. In contrast, Tesla has yet to report a full year of positive earnings giving it a meaningless P/E ratio and a forward P/E ratio of nearly 30 times (source: yahoo finance). While neither GM nor Tesla pay a dividend, their reasons for doing so are quite different. GM has just emerged from a bankruptcy coupled with a government bailout, whereas Tesla is using all the cash it can to fund the development of new models and repay the Department of Energy loan it received.

The Toyota-Tesla tie-up

Among the major automotive players, the closest comparison for Tesla may be Toyota. For the last few years, the two automakers have worked closely together with Tesla supplying parts for Toyota’s EV program. As part of a financing agreement, Toyota purchased $50 million in Tesla stock giving the mega automaker a small equity stake in the company. But perhaps the biggest help to Tesla was Toyota’s sale of the former NUMMI facility to Tesla for only $42 million.

Despite being rivals for the top of the sale charts, Toyota’s market cap is roughly five times the size of GM’s. At $187.4 billion, Toyota is an automotive giant that swiped market share right out from under the Big Three’s noses by producing reliable cars that gained acceptance among the car buying public. But it took decades for Toyota to become what is has today and unless Tesla invents something beyond revolutionary, Tesla will have to work hard for a long time to get anywhere near the size of Toyota.

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