I had not been following Tesla Motors Inc (NASDAQ:TSLA) very closely leading up to the stock’s sharp rise, but with all the hype surrounding the company, I had to look at it a bit closely. As pundits touted the company as the fourth great U.S. automaker, and investors cheered over the recent quarter’s “profitability,” I just had to learn about what I was missing. Upon completing a bit of research, I can safely say I‘m not buying the hype.
ZEV credits fueling profit
Tesla stock recently rallied as the company reported its first quarter of profitability with GAAP net income of just over $11 million. However, buried below the headlines is a discussion of revenue and the $68 million of revenue generated by selling zero emission vehicle, or ZEV, credits to other automakers.
Due to recent legislation, automakers will be required to have ZEV credits either by manufacturing ZEV vehicles or purchasing them from other manufacturers. The market for ZEV’s is expected to decline as the Nissan Leaf becomes widely available and Nissan floods the market with ZEV credits. Tesla Motors Inc (NASDAQ:TSLA) acknowledges that they plan to have gross margins of 25% without any ZEV credits. While that claim remains to be seen, the ZEV revenue in the current quarter needs to be scrutinized.
While Tesla conveniently mentioned that ZEV credits accounted for 12% of revenue, let’s call a spade a spade. The ZEV revenue essentially accounted for $68 million to the bottom line. The credits resulted from vehicle production, so all associated costs were already incurred in production. Assuming no costs for the revenue, the company had a net loss of $56.75 million, or $0.49 per basic share. Even at a 50% margin on these revenue, the company had a net loss of $22.75 million, or $0.20 per basic share. While Tesla Motors Inc (NASDAQ:TSLA) eported a profit, the sources of the profit are fleeting and will likely not be around much longer as the electric vehicle market becomes more competitive.
Benefits of ownership
After looking at the earnings release, I wanted to better understand Tesla’s value proposition. Their annual report indicates that a Tesla owner would save approximately $1,800 a year in fuel costs over a six year period. The specifics on their calculation can be found in the report. They also think the cost of maintenance should be lower, but they offer no way to quantify the savings.
Tesla also quotes all of its vehicle prices after the $7,500 federal electric vehicle credit. While there are currently no income limits on the credit, the future of the credit is not guaranteed given current government constraints.
Next, I looked at if I could be environmentally conscious without purchasing an electric vehicle. I stumbled upon carbonfund.org, and learned that for $54.42 a year, I could offset the carbon footprint of a full-size vehicle getting 19mpg-28mpg driven 12,000 miles per year.
Armed with this information, I undertook a simple net present value, or NPV, calculation to determine the present value of Tesla’s benefits. For technical purposes, I discounted the federal tax credits back by one year to represent the fact that the credit is claimed on a tax filing and not recognized at the time of purchase.
| Year | 1 | 2 | 3 | 4 | 5 | 6 |
| Fuel Savings | 1,800 | 1,800 | 1,800 | 1,800 | 1,800 | 1,800 |
| Discounted to Year 0 | 1,714.29 | 1,632.65 | 1,554.91 | 1,480.86 | 1,410.35 | 1,343,19 |
| NPV of Fuel Savings | $9,136.35 | |||||
| Carbon Offsets | 54.42 | 54.42 | 54.42 | 54.42 | 54.42 | 54.42 |
| Discounted to Year 0 | 51.83 | 49.36 | 47.01 | 44.77 | 42.64 | 40.61 |
| NPV of Carbon Offsets | $276.22 | |||||
| Federal Tax Credit | 7,500 | |||||
| NPV of Federal Tax Credit | $7,142.86 | |||||
| NPV of all Benefits | $16,555.32 |
The above calculation uses a 5% discount rate, for arguments sake, a 3% discount rate leads to a NPV of $17,327.30 and a 8% discount rate leads to a NPV of $15,517.20. The discount rate should reflect the income you could earn on your cash in an outside investment. My 5% rate reflects a conservative investment allocation, 3% reflects the risk-free rate or treasuries, and 8% reflects a more aggressive asset allocation.
The NPV number represents the present value of all economic and environmental benefits gained by purchasing a Tesla Motors Inc (NASDAQ:TSLA) vehicle. I take the present value of the savings from ownership and the cost of carbon credits to offset a similar combustion engine vehicle so that I can compare the NPV and Tesla selling price to the selling price of non-electric vehicles. This is eliminating all the hype and trendiness of the product and looking simply at the economics of the Tesla value proposition.
What I get for the money
Tesla Motors Inc (NASDAQ:TSLA) offers several versions of the Model S with different sized batteries. They range in price (without tax credit) from $59,900 for a base model with the smallest battery to $94,500 for the performance model with largest battery. However, the $59,900 model has been eliminated due to low demand.
The Model S with the largest battery gets a max of 250 miles on a charge and costs $79,900. The performance model with a similar range costs $94,500. However, as a recent NY Times article showed, the range estimates can vary dramatically from actual performance.
Based on these prices and the NPV calculation, you could buy a combustion engine vehicle priced up to $77,944.68 and break-even with economic and environmental benefits of a Tesla Model S Performance. At this price point, you are looking at vehicles such as the BMW M3 or 5 series, Mercedes E class, and Audi A8. These vehicles also come with the convenience of not having to constantly remember to plug in your car or plan long road trips around super stations being available to charge your car while you wait an hour.
Other electric vehicles
While Tesla’s value proposition doesn’t add up, other company’s are making more appealing electric vehicles. Nissan‘s LEAF is an all-electric vehicle offered around $30,000. Assuming a similar value proposition to Tesla Motors Inc (NASDAQ:TSLA), the economics make a much more compelling argument. The LEAF has also been selling quite well, reaching 25,000 units sold in the U.S. and 62,000 sold globally as of April 2013. Sales of the LEAF were up 423.5% in the month of April versus the same month last year. Nissan has clearly demonstrated that there is strong demand for a lower cost electric vehicle.
Alternatively, General Motors Company (NYSE:GM)‘s Volt offers a compelling argument at an approximate price of $40,000. The Volt also offers the convenience of an incorporated combustion engine so you wont be stranded if you lose your charge. General Motors has also realized the need for a cost effective model and recently announced plans to reduce production cost by $7,000 to $10,000. They aim to make the Volt more affordable and profitable. Volt sales were up 8.4% through March 2013.
Foolish conclusion
Tesla Motors Inc (NASDAQ:TSLA) seems to be flying high on hype. While they are moving vehicles, there products are not economically rationale and are not marketable to the masses. The better play on electric vehicles belongs to Nissan and General Motors who have created vehicles that are more inline with the 2012 average new vehicle price of $30,000.
John Timmes has a position in General Motors. The Motley Fool recommends General Motors and Tesla Motors . The Motley Fool owns shares of Tesla Motors.
The article Debunking the Tesla Myth originally appeared on Fool.com.
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