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.
While Tesla Motors Inc (NASDAQ:TSLA) essentially has to start from scratch, both General Motors Company (NYSE:GM) and Ford are massive companies with extraordinary technology and an expansive ecosystem. GM and Ford Motor Company (NYSE:F) both have large networks of dealers and auto shops, meaning it would be much easier for either company to quickly incorporate charging stations for electric vehicles into these established locations, thus making an electric vehicle from either Ford or GM more convenient for consumers.
Final Thoughts
What most people don’t realize is that GM is not far behind Tesla in the electric vehicle market. Tesla’s Model S sold 8,850 units in the first five months of 2013, and Chevy’s Volt sold 7,157 in the same period. Yet, GM has not seen the same level of excitement for its success. In fact, many have viewed the Volt as a disappointment.
The fact of the matter is that this market is growing rapid, and Tesla Motors Inc (NASDAQ:TSLA) is going to face real competition. NY Daily News estimates that by 2020, the U.S. could see electric vehicle sales of 1.8 million annually. Currently, U.S. auto sales are expected to be more than 15 million in 2013, and are expected to grow to 17 million by the end of the decade.
Last year, electric and plug-in hybrid auto sales totaled just 0.02% of all passenger car sales, but if expectations are correct, in 2020 roughly 10% of sales will be hybrid or electric. As a result, Ford Motor Company (NYSE:F) and GM might be the most attractive investment opportunities to capitalize on this space due to their resources, ecosystem, and their ability for mass production. Not to mention that Japan and China control almost half of the electric vehicle market, and both Ford and GM have strong footprints in both regions. Tesla does not!
In the end, Tesla Motors Inc (NASDAQ:TSLA) has done what neither GM nor Ford were able to accomplish: it has created excitement around the electric vehicle concept. The problem is that all the upside appears priced into its stock — or at least the majority – and now that GM and Ford Motor Company (NYSE:F) know what the consumer wants, I expect both to become more competitive.
The article Will Accelerated Growth Push This Expensive Stock Higher? originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols owns shares of Ford. The Motley Fool recommends Ford Motor Company (NYSE:F), General Motors Company (NYSE:GM), and Tesla Motors . The Motley Fool owns shares of Ford and Tesla Motors Inc (NASDAQ:TSLA). Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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