Tesla Motors Inc (NASDAQ:TSLA) (NASDAQ:TSLA) was trading higher after CEO Elon Musk stated that he sees the company selling 200,000 units per year within three or four years. While this may be likely, does it make Tesla a buy?
A Bullish Plan
Currently, the “average” Tesla Model S costs close to $100,000, but what’s important to remember is that over the next 3-4 years Tesla Motors Inc (NASDAQ:TSLA)’s average purchase price per car is expected to drop to about $70,000.
Elon Musk has already stated that he has lower cost models in the works, and most assume that these models will at some point be the bulk of Tesla’s sales. Therefore, if we assume a $70,000 average price and multiply it by 200,000 units per year, then we have $15 billion in annual sales.
Most innovative technology or hyper-growth companies are valued to some level on future expectations. Such is the case with Tesla Motors Inc (NASDAQ:TSLA), a company that many are comparing to Amazon, Netflix, and other such companies. However, in reality, Tesla may have an innovative approach, but it is still an automotive company, and sooner or later it will trade like one.
At $103, Tesla is trading with a market cap of $12 billion, or 12.5 times the last 12 month’s sales. If the company maintains its current valuation, and we incorporate three/four year guidance (and assumed revenue), then Tesla Motors Inc (NASDAQ:TSLA) is trading at 0.8 times future sales of $15 billion.
Currently, General Motors Company (NYSE:GM) trades at 0.29 times sales and Ford Motor Company (NYSE:F) trades at 0.43 times sales. Therefore, Tesla still trades at a lofty premium to its peers, but because of its growth and technology, this premium is accepted by Wall Street.
Two Key Takeaways
To me, there are two key takeaways with this scenario.
The first is that by using this model, Tesla Motors Inc (NASDAQ:TSLA) presents very little upside over the next three to four years. In my opinion, if Tesla can hit its target it will most likely trade at a premium to the auto space, but I doubt it will be a 1,000% premium (four times sales) as its fundamentals develop.
Right now, the company is almost purely speculation, and sometimes speculation can carry valuations to an obscene level due to irrational exuberance. But like I said, this eventually ends, and within four years I believe that the Tesla craze will die down.
My second takeaway involves the company’s expansion program with charging stations. Currently, the company is paying $250,000 to build charging stations throughout the U.S., and plans to drastically expand over the next few years. While this is necessary in order for the company to reach its goals, I do wonder about how potential competitors will innovate.
Both Ford Motor Company (NYSE:F) and GM have invested heavily into R&D to create more fuel-efficient vehicles. Most predict that in time electric vehicles could double the operating margins of traditional gasoline ran vehicles, although it is still too early to know for sure.
