Tesla is one of the most controversial companies. The first issue is whether electric vehicles will gain significant share in the market. The second issue is corporate governance and controversial acquisition of SolarCity. The third question is valuation – is it somehow rational?

Let’s have a closer look on the company, value development etc.

First of all, company is doing cars, but scale is not big so far: We maintain our guidance of 50,000 new vehicle deliveries for the second half of 2016, with a Q4 plan of just over 25,000 deliveries, despite the challenges of winter weather and the holidayseason. Business is quite well integrated, as company operates also superchargers. Adding SolarCity makes sense to keep a value added started from battery and ending on car. The issue is price, which is always a problem in deals with related parties.

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The main competitors are other car manufacturers – VW, Toyota, Daimler, and many others. The key question is – Tesla is putting tones of money on R&D. Imagine other companies want to strongly enter electric vehicle market. With their so much bigger budgets is it hard to compete with Tesla? I am not sure about competitive advantage of Tesla, however their cars are beautiful.

Currently company has $32b of market cap. Net debt is approximately 0 (3b cash and more or less the same debt), so company can further invest.

Market consensus:

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Well, valuation is super high comparing to financial results, but let’s discuss with consensus. For 2016 guidance is 50k of cars. In Q4 it is 25k, so next year base case scenario is 100k+. Target for 2018 is 500k, which is quite ambitious. Assuming 500k of cars revenues should be more than 2 times higher, shouldn’t they? OK, if you sell in leasing then revenues are lower, but they are certain in many periods ahead!

Taking average cash price of around $80k means $40b of revenues. 10% of operating margin should be possible in long term, so it gives us around $4b of profits -> valuation is not so high!

The question is whether 500k of annual units sold is possible… let’s have a look on peers:

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As we can see the 500k of units is much below sales of many cars manufacturers, so it is possible.

Share price is at the same level as peak in 2013. Well, since that time value of business definitely increased, so it is better to buy shares today than back in 2013.

Current valuation is high, but in long term I see further potential. If only you can close your eyes and forget for many years…

On the other hand look at BMW market cap – it is twice as high as Tesla and it is selling 2m units of cars, so 4 times more than Tesla expected in 2018…

 

Summing up, Tesla is an interesting company and I understand people who currently buy shares. I will think about it – it is quite risky, no dividend, but value appreciation can be quite strong in the following years. If opportunity like February sell-off comes then I will definitely buy.

 

Disclaimer: TSLA – no position