Tesla Motors (TSLA: NASDAQ) — the Palo Alto-based maker of electric cars — shares now trade at over $180 and are up 430% YTD. While analysts have generally had positive outlooks on the shares, some are starting to diverge with their investment opinions. While there are still many buy ratings, some have moved to the sidelines based on valuation. S&P actually initiated coverage on Wednesday with a sell rating on the shares and a $150 price target. This is inline with our thoughts earlier this year on Tesla stock.
The concern, however, seems focused not on fundamentals but just a rich valuation. Typically, when stocks trade at very rich valuations, a slight misstep in a quarter can lead to a dramatic sell-off. That said, sell ratings on stocks that have a good business with positive fundamentals often continue to defy reason with their valuations. There are also the bulls that are saying Tesla is still a buy; Wedbush upgraded Tesla to an outperform rating Tuesday this week with a $240 per share target price.
About Tesla Motors
Tesla Motors designs, markets, and manufactures electric vehicles and electric powertrain components at its facility in Palo Alto, CA and at the Tesla Factory. Tesla’s vehicles, the Model S and Roadster, have been well-received by consumers. The company designs many of its important components, such as lithium-ion battery packs, electric motors, and gear boxes, and is not merely an assembler. This leads to higher margins and has made Tesla a leader in electric vehicle technology.
Tesla also differentiates itself from other auto manufacturers by not only building electric vehicles but by selling directly to consumers. It does not use dealer networks, which all other manufacturers do. It plans to have 45 stores and 75 service centers by the end of 2013 located in major metropolitan areas in North America, Europe and Asia. This has led to some tension, lawsuits in certain states, but also better control of its product and higher margins for Tesla. Long-term management has said it may shift to a dealer network, but not likely until volumes are significantly higher than current levels.
The reception and subsequent success of its vehicles has driven the recent outperformance at Tesla. Earlier this year, results, sales, and profitability at the firm were better than expected and have remained so since. The Model S continues to sell well in North America and international demand is accelerating in Europe, as well as Asia. This quarter, the expectation is for 5,200–5,500 Model S deliveries globally.
The outlook and share price for Tesla will be driven by a few key factors going forward: production capacity expansion, demand for the Model S, Model X, and Gen III vehicles, and the future earnings and cash flows associated with these. The Model X is expected to start contributing to sales in 2015 with the full benefits in 2016.
The company plans to have annual production capacity of 40k vehicles at its Fremont plant by the end of 2014 as it increases efficiency. It could increase this to 50k vehicles with some additional investment. The plant builds its Model S and will begin building the Model X. The Model X is an SUV based on the Model S platform. Management has indicated that it could increase production by adding a second line giving it total production of 80–100k vehicles per year.
When it starts production on the Gen III vehicles it plans to have 100k of annual production capacity. This would be using one shift and management indicated adding a second shift could give it a production capacity of 200k vehicles annually. By 2020, annual capacity is forecast by management to total 500k vehicles.
Demand for the new Model S is expected to be strong with Tesla easily selling all it can produce. As production capacity ramps, international demand will play a larger and larger role. Gasoline prices, due to higher taxes, are 2–3x higher in Europe and other parts of the world when compared to U.S. levels. This could increase the attractiveness of the all-electric Tesla vehicles. Long-term, management expects a third of sales from Asia, Europe, and North America each.
Possible Problems for Tesla
Delays in its production schedule due to supply problems or a temporary issue in expanding production present a key risk for the quickly-growing firm. Also, while government support via tax credits and other benefits has been strong it could subside which would reduce the level of future cash flows.
Earnings are forecast to grow at almost 200% based on current consensus forecasts. The stock currently trades at 105x and 57x FY14 and FY15 earnings, respectively. A rich valuation but not wild for a very high growth technology-related firm. However, in this case a DCF which requires modeling out the cash flows over the next 5 to 10 years is probably a better approach to capturing the value. Most analyst price targets, which also cover a wide range, (some indicate upside and others downside) use this approach.
|Consensus EPS Estimates|
All this said, there is a lot of disparity within the estimates. For example, the low-end earnings estimate for FY14 is $1.16 and the high-end is $1.73. The difference is even wider in 2015. The wide range of estimates shows that the future of the share price is anything but certain.
What are your thoughts on Tesla given how it’s performed over the last year?
John has seven years of experience as an equity analyst following various stocks and sectors. As a senior equity analyst, he received awards from the Wall Street Journal and Financial Times for his writing.