Why I believe TSLA is undervalued

Why I believe TSLA is undervalued

Here is my reasoning that Tesla, as a stock, is undervalued at $170 per share.

Demand and Production: Both demand and current production for the Model S in 2013 are much higher than previously announced. According to Tesla’s Forum, they are presently building cars at a rate of 40k per year. In their most recent quarterly report, they issued guidance for building 21k cars this year, however they have already assigned a VIN# above 25k as of October 1st. My estimation is that they will deliver over 25k cars this year….a 20% increase from previous guidance. Additionally, I believe they will deliver over 50k cars next year. Remember….Tesla has only very recently commenced delivering cars in Europe, and has yet to deliver cars to Asia. Demand has not been a problem to date, and I do not believe it will be for the foreseeable future.

Stock Valuation: A stock is valued for future earnings. Assuming Tesla builds 50k cars next year with an average price of $80,000, revenue for 2014 should be in the neighborhood of $4 billion. Tesla has already given guidance of a 25% gross profit margin on sales for Q4 of this year. Assuming that number holds steady (a conservative estimate given production efficiencies inherent in higher numbers), we see a gross profit of $1 billion for 2014. That gives us a P/E ratio of 20….and a growth rate of 100%.

Outlook beyond 2014: Remember, a stock is valued for future earnings. The Model X, Tesla’s SUV, is slated to begin production at the end of 2014 and already has over 8,000 reservations. Tesla has announced that they will introduce a ‘3rd generation’ car, slightly smaller than the Model S with similar range, for a price around $35,000 to $40,000. As that car comes closer and closer to reality (plans right now are to have the car delivered in 3-4 years), the market will become giddy with anticipation. In other words, when a prototype becomes public, the stock will respond very positively. I predict that Tesla will sell over 100k cars in 2015….and I believe that number will prove to be conservative.

Competition: GM has announced that they have assembled a team to analyze Tesla, and will produce an electric car in 3-4 years to compete with Tesla. GM is not, nor ever will be, in competition with Tesla any more than they are in competition with Mercedes or BMW. It simply isn’t a luxury brand. Additionally, by that time Tesla will have over 100k EV cars on the road, and will be light years ahead in terms of technology. Toyota has announced that there simply isn’t demand for EVs, and essentially is getting out of the game (for now). BMW is producing an i3, all electric vehicle. One search on Google for the i3 shows that this car is clearly not in competition with Tesla. In short, by the time any other car company takes a serious swipe at Tesla, the market will already be dominated by this leader.

Another Note on Demand: I’ve owned this car for almost a year and have driven over 15k miles. Here are some of the many selling points:

- Twice as efficient as a Prius
- Safer than any Volvo ever produced
- As fast as a Ferrari F430 from 0-100
- Smoother than a Bentley
- As attractive as the finest Maseratis
- Requires less maintenance than any car ever produced.
- Has the center of gravity as low as a Lamborghini, and corners like a dream.
- Has more cargo space than most SUVs.
- When traveling cross-country, electricity is free. (Imagine if Porsche ever gave away free gas!)
- More technologically advanced than the Mercedes S class. (Think of the app, the screen, etc.)
- Is kinder to the environment than any car ever produced.
- Is made in America (think about how many millions of people bought crappy cars from Chrysler and GM over the years, simply because it was made in America!)

Look at that list for a minute. Any one of those selling points would bring thousands of sales in to any regular vehicle. Put them all together… imagine them all in the same car! I welcome thoughts and criticism.

JHM | October 4, 2013

Not bad. There is more to earnings than just gross profit, but the number of cars and gross profit per car are the big drivers. You may check out this sight for good discussion on investing in Tesla, Good luck.

JHM | October 4, 2013

Regarding competition, Tesla welcomes EV competition. It validates the product for consumers and accelerates mass adoption. However, few automakers will want to hasten the obsolescence of their ICE product lines.