Tesla: Lofty Dreams Versus Ground Reality

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Feb 16, 2015

Futuristic ventures friendly with nature have a leader among themselves, who has managed to carve out its own brand image. The name is Tesla (TSLA, Financial).

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Headed by Elon Musk, Tesla is associated with making eco-friendly vehicles which match up, and perhaps also exceed much of the conventional counterparts when it comes to features and value. But recently Tesla hasn’t been up to the mark with its market performances as estimated by industry experts. In 2014, the company was believed to be delivering 35,000 units of its Model S sedan, but it downgraded those figures to put the number at 33,000 instead. In the fourth quarter alone, the original estimate for Tesla cars was 11,200 pieces but Bloomberg pegged it closer to 10,832. Though these would garner slightly lesser attention as compared to the deliveries volumes, but Tesla has been estimated to bring in $6 billion in revenue, and an EPS of $0.32. The current trading average of the stock is $216, which is way below the 2014 peak of $291. Also the target prices are extremely varied, ranging from $65 as pegged by Bank of America (BAC, Financial) to $400 by Stifel Nicolaus (SF, Financial), which in turn creates doubts in the minds of investors.

However, despite the less than impressive numbers, the enthusiasm of Elon Musk has not gone down. He feels that by 2025, his company will be worth as much as Apple (APPL) is worth today, which is close to $700 billion. This could be a possibility only after the Tesla stock goes ‘insane’ over the next decade, but commanding such a value might just be overstating its weight. Long before those days arrive, Tesla has to worry about what Apple is doing in terms of developing its own car, being pegged as the iCar. Rumors are substantial this time around as Bryan Chaffin, the co-founder of The Mac Observer, has tapped into his sources in the Cupertino based tech giant, and says that the Apple iCar might be in the cards. Though still farfetched from today’s status, Tesla has to be prepared for all possibilities, if one takes Elon Musk’s estimates seriously.

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Why Elon Musk’s numbers are crazy

It is pretty clear that Elon Musk’s optimism is sounding more like fantasy than a calculated financial forecast. To reach the valuation of $700 billion in 2025, there needs to be serious number crunching and that it proves that it was seriously ‘back of the envelope’ as Elon himself put it.

  • If revenues grow by 50% every year, going by the estimated $6 billion in revenue currently, the total revenue for Tesla by 2025 would be $346 billion. By Elon’s own admission, the company’s margins could be around 10% average, which takes it to $34.6 billion by that year.
  • It has been noted that, traditionally, companies who reach a certain size tend to slow down in growth as is happening with Apple, Google (GOOG, Financial), and Facebook (FB, Financial). In that case, selecting the valuation of the company to be 20 times its estimated profits does become farfetched, also because traditionally car companies like General Motors (GM, Financial), Fiat Chrysler (FCAU, Financial), Honda (HMC, Financial), and Toyota (TM, Financial) have been valued at 15 times its yearly profits.
  • Even if one considers that the Elon’s numbers will match up, there needs to be greater thrust from the production and logistics departments of Tesla. With an estimated 33,000 units of sale in a year, there is nothing to otherwise show that revenue will flow in such good numbers. Tesla needs to be selling their cars by millions, not thousands, and that may not happen until they get more mass market especially with the price tags.
  • The financial books aren’t showing a pretty picture either. Though they turned out to be a huge hit when they went public in 2010 and have gained 10,000% since then, the recent readings are too pleasing. In 2015 thus far, the shares have fallen way off their 2014 high- point when they reached $291 a share, and is currently trading near the $200 mark. The fourth quarter losses have been pegged at $108 million or 86 cents a share, which was just $16.3 million a year ago or 13 cents to a share then. According to Musk, 2015 will also fuel a lot of global expansions, so margins won’t get any better soon.

Competition speak

Though in another genre of business altogether, Apple is known to be developing what some speculators are calling the iCar. Another high technology offering for the future, it might be more in line with Google’s driverless car, but with even more sophistication that the company is known for. What this will do for Tesla is put more pressure into their R&D sector, and make them innovate on their product, which in turn would mean further capital expenditures on the existing estimates.

Final thoughts

Tesla will be on with a decent lot of struggles in 2015, even though Elon Musk thinks that the company might grow by 70% in the year. The high CAPEX and turn-around time for new branches around the world will cut on the profit margins, and the below expected delivery in its existent markets make it tough for high growth to actually take place. But with markets such as China on the horizon, Tesla could have a turnaround of fortunes but will only be a shot in the longer term scheme of things. In other words, 2015 is when the company will break even with the investments, but progress beyond will only come later.