my approach to Tesla (TSLA): momentum or not?

the general idea

TSLA is what would be called in Asia a “dream” stock    …or, in the US, a “concept” stock.  Personally, I like dream better, because the term underlines the considerable uncertainty surrounding a stock, no matter what one’s view of future prospects is.

On the other hand, TSLA is not nothing.  The company has the premier brand name in electric automobiles.  It is, so far, able to sell at list price and directly to consumer, instead of through an independent sales force.  Thereby, it can not only capture the wholesale markup on its autos, but the wholesale-to-retail markup, as well.  Close to a million potential buyers of the newest TSLA model have put down advance deposits of $1,000 per unit.

In addition, TSLA has a substantial electric battery business, which it is building in partnership with Panasonic.  Its jointly-owned Gigafactory will not only supply batteries for Tesla cars, but also for the nascent enterprise of storing for later use the electricity generated by the solar panels it manufactures through SolarCity.

The company is the brainchild of Elon Musk, a visonary with very high tolerance for risk who is most often compared with Jeff Bezos.  Amazon, however, has long since passed through the desert of red ink and into a greensward of large, and growing, net income.

Although TSLA isn’t profitable today, it would arguably be so if its ambitions weren’t continually growing.

putting numbers on paper…

…more to start a conversation than make any firm conclusions.

the auto business…

Annual sales of cars and light trucks in the US and EU are about 20 million units each.  Let’s add 10 million for the rest of the world.

…extremely simplistically

While we’re making things up, let’s say that TSLA can achieve a 2% global market share–meaning 600,000 cars/trucks a year–at some point.  Let’s be optimistic and figure that the average selling price will be $50,000 and that TSLA’s net profit margin is 10% (doing even the most superficial analysis using margins is a VERY BAD thing, but since this is a “dream,” I’ll take this extremely dangerous shortcut).  [Another note:  we can get to the same profit figure by assuming more cars at lower prices–and lower unit profits.]

This all implies that at some point TSLA will have yearly profits from its auto business of $3  billion.

the battery business

The results could be anything.  Let’s take two cases, though:

Case 1.  batteries break even:  no losses but no gains, either.

Case 2:  batteries somehow make $1 billion a year, a figure I plucked out of the air.


If the above is anywhere near correct, at some point (five years from now ???), TSLA will be making $3 billion – $4 billion per year.

If the future price were $250 a share, TSLA would have a market cap of $40 billion.  That’s the same as today’s.  It would mean a future PE based on my optimistic scenario of 10x -13x.  (For what it’s worth:  If I put a PE of 15x on battery earnings of $1 billion and a PE of 8x on auto results, I’d arrive at about the same $40 billion if batteries are profitable one day, but only $24 billion if batteries break even.)

This means that if I want to hold TSLA at $250 today I’ve got to believe that something better than what I’ve written above will actually come to pass.  That’s because something like what I’ve written seems to me to already be factored into today’s price.

What is the situation at $180 a share?  Well, the market cap of TSLA would be $29 billion.  At that price, a PE of 8x on yearly sales of 600,000 autos + batteries never making any money is what is baked into the cake.

More on Tuesday.




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