Tesla’s Reaching for $200, But Is it Going to Be Worth That?

Tesla Headquater

“Am happy to hear that GM plans to develop an affordable 200 mile range electric car. Right target. Hope others do same,” said Elon Musk via Twitter on September 19, 2013.

General Motors (NYSE:GM) has taken note of Tesla’s (NASDAQ:TSLA) rising star. Doug Parks, GM’s vice president of global product programs told reporters from The Wall Street Journal that the automaker is developing an all-electric vehicle with a range of 200 miles that will priced around $30,000. But that news did not keep investors from bidding shares of Tesla’s stock to a new all time high on Thursday which continued right on up Friday.

While the $70,000 price tag of the Model S sedan makes the car prohibitively expensive for most people in the world, Tesla has proven most other negative stereotypes of electric vehicles to be wrong — namely, that gas-powered vehicles are undoubtedly superior. The fact that Model S has been hit with several important accolades this year shows the industry agrees. Motor Trend declared the electric vehicle its 2013 Car of the Year, an award the magazine has been conferring for the last 60 years.

Consumer Reports, the iconic ratings magazine, gave the vehicle a near-perfect score of 99 out of 100, citing the electric car’s power, “pinpoint” handling and its quiet, well-crafted interior as the reason for giving it the highest rating of any vehicle the magazine has ever reviewed. “Is the Tesla Model S the best car ever? We wrestled with that question long and hard. It comes close. And if your needs are confined to the Tesla’s driving range, it just may be,” wrote the magazine.

Despite a harsh review in The New York Times earlier in the year, those awards have created more confidence in the brand. In early July, Jefferies analyst Elaine Kwei noted that approximately 17,500 all-electric vehicles have been sold so far this year, with the Model S and the Nissan (NSANY.PK) Leaf making up the vast majority of those units.

When the company reported second-quarter earnings, the popularity of Tesla’s luxury electric vehicle with the affluent and the environmentally conscious was clear from the numbers. The company sold 5,150 of the cars in the second quarter, or approximately 1,700 per month, a figure comparable to the sales of its top plug-in rivals — the Nissan Leaf and General Motors’ Chevy Volt. The comparable sales came despite the fact that the cheapest Model S comes with such a high price tag.

After data from the California New Car Dealers Association showed the Model S was the third-best-selling luxury sedan in the state — the largest U.S auto market — during the first six months of 2013, shares hit a new all-time high of $173.00. “Justified or not, the expectations for this company are now very high,” noted Baum & Associates automobile analyst Alan Baum, following the news. In fact, he likened the electric vehicle manufacturer to Apple (NASDAQ:AAPL). The company has “managed to cross the automotive and technology fields to become this hot commodity,” he stated.

Shares of Tesla’s stock have advanced around 425 percent this year to date. They hit a fresh all-time high of $180.47 on Thursday  which was quickly bested Friday with a peak of $185.83 and a close at $178.94. The gains Thursday and Friday followed the release of an optimistic assessment by Deutsche Bank analyst Dan Galves, who maintained a Buy on the company’s stock and raised its price target to $200, citing limited potential for negative catalysts in the near term.

“Based on conversations with [management] and monitoring information available on Tesla owners’ blogs, we believe that the company is on-track to modestly outperform Q3 margin expectations, that demand has continued to grow in the US and Europe (despite substantial option pricing increases in effect as of late July), and that the production rate at Tesla’s factory has continued to increase,” Galves wrote in a research note seen by Street Insider. “As Tesla continues to execute to margin targets and demonstrate strong demand for their product, confidence in the late-decade volume, margin, and earnings estimates that justify upside to the current valuation will likely grow.”

But for some experts, Tesla’s stock appears way too overvalued. Aswath Damodaran, a finance professor at the Stern School of Business at NYU, wrote in a September 4 blog post that even “assuming that Tesla will grow to be as large as Audi while delivering operating margins closer to Porsche’s,” he “cannot see a rationale for buying the company at today’s market price.”

He said it seems “absurd” to put a $20 billion market value on a company with revenues of $1.33 billion and an operating loss of about $217 million over the past 12 months. “At close to 15.4 times revenues, Tesla is being valued more like a young technology company than an automobile company,” he wrote. “However, these standard metrics are also often misleading with young companies, since value should be driven not by revenues and earnings today, but by expectations for these values in the future.”

In his opinion, it is conceivable for Tesla’s revenues to match the $100 billion or more generated by large automakers, but the revenue growth required to get to those levels would be incompatible with the high operating margins that he assumed for Tesla. What Damodaran means is that his analysis depends on Tesla manufacturing solely high-end electric vehicles with operating margins similar to the higher end of the auto industry and by manufacturing just high-end electric vehicles, the company will find it difficult to generate revenues on par with large automakers, which have a massive lineup of vehicles.

“The ingredients that make a young, money-losing company into a valuable, mature company are no secret: small revenues have to become big revenues, operating losses have to turn to profits, there has to be enough reinvestment (but not too much) to make these changes and the risk has to subside,” Damodaran wrote. “I am assuming all of these at Tesla but my estimated value per share of $67.12 is well below the market price.”

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