Tesla Motors Inc (NASDAQ:TSLA) finished Dec 2012 with $413 million in revenue of which 12% were Zero Emission Credits largely from California. 12% is a lot of greenbacks, but 88% of the revenue was derived from its primary sales of electric cars to consumers and ‘deliverables’ to the likes of Mercedes Benz for their growing effort into EVs. Any reliance on the current Carbon Credit laws will diminish in the future for 2 reasons. The first is a factor of the auto-market; Tesla Motors Inc (NASDAQ:TSLA) will grow outside of the bounds of California and other companies will produce more efficient cars. It’s a no brainer, unless there is a marked change Tesla Motors Inc (NASDAQ:TSLA) will get less ZEC revenue per produced automobile.
The second reason is that Tesla Motors Inc (NASDAQ:TSLA) is an old school manufacturer. It has production facilities and machinery that eat money like the tiny balls in a game of Hungry Hungry Hippos. CEOs don’t typically like building factories only to see them unproductive because of an emerging and fickle market. Tesla Motors Inc (NASDAQ:TSLA) won’t say ‘no’ to its competitors handing them money, but it’s not creating cars to get ZEC profit. You may not like Elon Musk, the founder and CEO, but you cannot say he lacks the long view or ambition.
That Carbon Credit 12% did push the company into the black this quarter, but building out gas stations, car manufacturing, a battery producer, car servicing, and dealerships is no cheap task. Elon knows that he must eliminate consumer’s resistance to buying a luxury ‘golf cart’. Tesla Motors Inc (NASDAQ:TSLA) is taking points from Apple Inc. (NASDAQ:AAPL) on how to create a consumer experience.
What do I mean by that? Apple Inc. (NASDAQ:AAPL) has thrived on creating a buzz around a high-quality ecosystem they controlled from start to finish. Apple succeeds by creating a full user experience that should never require any other manufacturer or distributor. They created a system of cleaning up competitors products and making them beautiful and intuitively functional beyond expectations. Then they created cheaper versions to help price sensitive consumers live their gadgetry dreams.
As of late despite Apple Inc. (NASDAQ:AAPL) creating some great devices they are beginning to lose their hardcore apple fans. This goes beyond the infamous Apple Maps debacle and extends well into their other products. Samsung phones and various tablets are creating great if not superior experiences. The company should expect to see continued growth however its sheer size and the more competitive landscape leave breakouts in doubt.
Apple is not going to have the explosive growth they had before but the valuations are worth looking at. With a nearly nearly 3% dividend yield and a publicized effort to maintain high dividends and stock purchases over the following years provides a jumping off point for more work. The stock has seen extensive price volatility but is near its 1 year low. With a current Price/Earnings ratio at 10 it’s a reasonable price to consider what effectively is one of the largest cash holders in the world. With all this cash the company is stable if not it’s equity price. At a P/E of 10, dividends along the way providing a nice cushion to be paid to see if Apple can continue it’s history of beating expectations.
Tesla is taking the Apple manufacturing notes and building out a fully walled manufacturing economy. The implications can be dangerous for the rest of the car manufacturers. An upstart is creating the hottest car in generations and has taken strong first steps to create a national charging infrastructure. Not only is Elon doing ‘the impossible,’ but he is succeeding! 2013 Q1 sales for the luxury Model S outstrip similar competitors like the Mercedes S Class, the BMW 7 series, and Audi A8.
It is not a foregone conclusion this will be successful, but as of today it appears competitors or their consumers will need to sign onto the Tesla Motors Inc (NASDAQ:TSLA) model to have long distance viability. Battery’s and EV production car will get more efficient and the charging stations will be less of a fixture in the long-term Tesla strategy, but it will provide a dominating feature for Tesla to advance its platform through marketing and revenue as the other EVs play catch up in the coming years.
So what are the value of the ZECs to Tesla? Not much if you are counting them in terms of one year’s profitability. But Tesla’s internal rate of return is huge. Sure Tesla is scraping by profit-wise, but what is their future? They are the front runner for cornering an entire automobile segment and doing it to compete with ‘regular’ luxury cars! In 5 years what will their profitability be? Probably multiples of what it is now. Where else can Elon get that kind of return? Stocks, bonds, hedge funds? He might as well just plow all that money back into his paradigm shifting company. ZECs will become a minor role in their future, but for the moment they provide essentially free cash to juice their expansion.
The truth is that Tesla Motors Inc (NASDAQ:TSLA) the company is off to an incredible start, despite the speed bumps they have hit the past few years. They have captivated consumers and stock analysts alike. The question isn’t so much is Tesla a good company with a bright future, but does the valuation match its potential. As always that’s in the eye of the Foolish beholder.
The article Tesla: Value of the Carbon Credits originally appeared on Fool.com and is written by Andre Mittag.
Andre Mittag has no position in any stocks mentioned. The Motley Fool recommends Apple and Tesla Motors. The Motley Fool owns shares of Apple and Tesla Motors. Andre is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
