Thesis: Tesla lofty growth expectations may be unrealistic.
Tesla founder, Elon Musk, recently tweeted about when Tesla is going to reveal a new product line which instantly caused shares to gain a few percentage points. This got me thinking about how Tesla is valued and it’s market capitalization. Tesla has a $24 billion in market capitalization, which compares to General Motor’s $58.8 billion and Ford’s $63.4 billion.
Ford has been around since 1903 while GM was founded in 1908, so both have survived the Great Depression as well as the Great Recession. These are old reliable companies that have proven their stability over the years. Tesla, on the other hand was only founded in 2003. As noted in the Wall Street Journal, “In 2014, Tesla delivered 31,655 vehicles.” Ford and GM on the other hand, sold 220,671 & 274,483 vehicles in just one month (December 2014). If you look at the market capitalization per each car sold in a year, Ford and GM are about $25.5 thousand, while Tesla is trading at almost $760 thousand. This is because of the fast potential for sales growth that Tesla offers. However these goals might be a bit too lofty to be reasonable. Elon Musk “has set a target of 55,000 deliveries in 2015, and 500,000 by 2020. If met, these targets would transform the Palo Alto, Calif., auto maker’s profile in the cutthroat car business. While its sales are a fraction of what is sold annually by most auto makers, the targets are audacious goals for a company that started mass-producing automobiles less than three years ago.” While the 55,000 deliveries in 2015 is a realistic goal, scaling this business all the way to 500,000 by 2020 seems almost too lofty of a goal.
A big question concerning Tesla’s growth is if the demand will be there for that many electric cars. This demand will have to grow exponentially to make Tesla’s valuation justified. A big concern that could halt this fast demand growth would be if Ford or GM (or anyone else) keeps increasing the fuel efficiency of their automobiles with advances in MPG. If they do, as I suspect they will raise the MPG to well above 50 for almost all vehicles, then the demand for these electric cars might not come about in such great numbers. The potential savings of these electric cars would be much lower if the fuel efficiency increases at a reasonable rate. These are all reasons that I think Tesla’s stock valuation, based on these lofty estimates for exponential growth may be too lofty to be reached.