Ford is planning on increasing its commitment to electric vehicles by making sure all of the technicians at its dealerships are certified to work with electric vehicles. Currently, Ford dealerships are starting to install electric charging stations to help make long distance travel much more feasible. The company plans to increase the range and efficiency of its cars, but it seems that Tesla Motors is well ahead of the curve. That’s not to mention that the Tesla Model S is a much more attractive vehicle than the Ford Focus Electric.
The GM Volt, on the other hand, doesn’t even bother with being a full electric vehicle; it’s more of a gas-and-electric hybrid. This makes the company’s product pretty uncompetitive in comparison to Hyundai Sonata Hybrid and Ford’s Fusion Hybrid. The two car companies are doing a better job of selling cars in the niche then GM is with its Volt.
General motors is going with the ultra-cheap plan. It has recently introduced the Chevrolet Spark Electric 2014 model to the world. The car is cheap, at a surprising $20,000, and offers an 82-mile per charge range. Currently, the Spark is available for order in limited quantities across participating dealers in California and Oregon. The Chevrolet Spark is ridiculously small, and it looks similar to the Smart for Two. The car looks hideous, but it wins the cheapest electric car of the year award by a long shot. I am not sure how the American market will respond to this car, but it seems Tesla is also pursuing lower-end cars too.
Elon Musk plans on capturing an even larger percentage of the electric vehicle market with a third-generation car at $30,000 in three to five years. With a 208-mile range if not more and a host of fuel charging stations, the company could effectively shut larger competitors out of a lucrative market for high-end and perhaps even lower-end electric vehicles. If that is the case, we have to come up with an even broader assumption as to Tesla Motors Inc (NASDAQ:TSLA)’s future revenues.
Let’s not forget that Tesla Motors Inc (NASDAQ:TSLA) has a better distribution strategy than the dealership model imposed by ToyotaToyota Motor Corporation (ADR) (NYSE:TM), Ford, GM, and Honda. The fact is dealerships are expensive to operate and cannot be opened and closed as rapidly as showrooms in malls. Also, selling a Tesla car in a show room and shipping it directly to the customer is pretty practical in light of the capital constraints Tesla Motors currently faces.
Future valuation
The total number of cars that Tesla is projected to sell will be approximately 65 million according to Scotiabank. Because Tesla Motors is planning on becoming a global player over the next five years, it is highly likely that the total number of vehicles Tesla will sell will capture at least 1% of the global market for vehicles by 2018. This means that TeslaTesla Motors Inc (NASDAQ:TSLA)motors will sell at least 650,000 vehicles. Assuming that 10% of those sales are Tesla Model S and the remaining are the $30,000 model, the company will generate $234 million net income from the model S, and the $30,000 model will bring in about $877.5 million. Combined, Tesla Motors can generate $1 billion in net income by capturing 1% of the total market for vehicles.
Capturing 1% of global market share can be accomplished by targeting markets that are dense with high income. This includes the South Asia Pacific, certain regions of the United States, certain regions of Europe, and some of South America. If the company were to represent 2% of global vehicle sales, the company’s net income would double to $2 billion. Therefore, the $11.6 billion valuation is reasonable.
Companies always trade at a premium over earnings growth. So when Tesla Motors is making $1 billion it is highly probable that the stock will still be trading at an above-average price-to-earnings multiple. My guess is the P/E multiple will be in a range of 20 to 30 times. This implies that the stock could be trading at around a $20 billion to $30 billion market capitalization over the next five years.
Conclusion
I believe that Tesla Motors Inc (NASDAQ:TSLA) should be bought during this dip. Assuming a $20 billion to $30 billion market capitalization in the future, the stock could be considered cheap in light of the future growth potential of electric vehicles. That being the case, over the short term this stock’s beta is extremely high. So if the stock market were to decline by 5% to 10%, the value of the stock could decline by 15% to 30% in a matter of weeks.
The short-term correction should be seen as a potential buying opportunity in the hopes that the company grows into becoming a five- or ten-bagger over the next ten years.
I anticipate that there will be a lot of negativity surrounding the company in the next few weeks while the stock is declining. It would be better to focus on the long-term and to ignore the short-term chatter.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford and Tesla Motors.
The article Buy Tesla Motors on the Dip originally appeared on Fool.com.
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