Tesla expects its $35,000 affordable car to have a 200-mile range. However, earlier this year, the company killed off the 40 kWh version of its Model S sedan — which offered a 160-mile range — due to poor demand. The utility of a fully electric car decreases dramatically as the range gets lower. So even with a $35,000 price point, Tesla might be able to sell only 100,000-200,000 units of the next-generation car annually.
Furthermore, while I believe that Tesla can meet or exceed its gross margin goal of 25% when it is just selling the luxury Model S sedan, I do not think it will be able to earn such generous margins on a $35,000 car. General Motors Company (NYSE:GM)’s Chevy Volt now starts at $35,000, and GM was apparently losing money on every Volt it sold even at a higher ($39,000) price point.
The Chevy Volt (courtesy of General Motors)
While electric vehicle production costs are coming down, Tesla would dilute its brand severely by making a car as spartan as the Volt. As a result, I suspect that Tesla’s hypothetical $35,000 car would have a gross margin of just 10%-15%.
Foolish bottom line
If Tesla managed to sell 100,000 luxury cars (Model S and Model X combined) and 150,000 affordable cars in 2018, that would be a great win for the company. Production would have grown 12-fold in just five years. At an ASP of $50,000, revenue would be over $12 billion; up sixfold from expected 2013 revenue of just over $2 billion.
Assuming that overall company gross margin declined to 20%, but operating expenses fell to 10% of revenue (down from around 20% today), Tesla would post a 10% operating margin. After accounting for interest and taxes, this would imply EPS of $5-$6, depending on the extent of shareholder dilution between now and then.
Is Tesla really worth 25-30 times 2018 earnings? I doubt it. By that time, there are likely to be viable competitors in the EV market, and the green car enthusiast market will be more or less saturated. In other words, Tesla’s growth rate is likely to be much lower at that point. Of course, it is possible that Tesla will manage to produce more than 250,000 vehicles in 2018, but that also seems fairly unlikely; I am already projecting a lofty 65% compound annual growth rate for vehicle production.
In other words, if Tesla is not quite priced for perfection today, it is fairly close. If the company falls short of investors’ expectations in any way — i.e. lower than expected profit margins, more production bottlenecks, additional vehicle development delays — the stock could fall very far. So what do you think? Should I short Tesla? Let me know in the comment box below.
The article Why I’m Thinking About Shorting Tesla originally appeared on Fool.com and is written by Adam Levine-Weinberg.
Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends General Motors and Tesla Motors. The Motley Fool owns shares of Tesla Motors.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
