Monday, November 4, 2013

Can Tesla Grow into its Earnings Multiple?

Tesla (TSLA) has been one of the most electric performers in 2013 and the company has a style and flair in its DNA that comes directly from its CEO Elon Musk. Many believe the sky is the limit for Tesla and some investors like to look out to earnings in 5 years to justify current valuations. But it is possible that along the road, the valuation of this company will hit some speed bumps?

We believe the answer is best demonstrated in a bullish forecast. If you project forward to 2018, Tesla will most likely have launched its Model E sedan in 2015 and will have sold this mainstream electric vehicle at a cost of $40,000 for about 3 years. If they sell 415,705 total vehicles in 2018 it would represent 80% production growth from 22,000 vehicles in 2013, 39,600 in 2014, 71,280 in 2015, 128,304 in 2016, 230,947 in 2017, 415,705 in 2018. If we use a sales mix of 20% Model S, 20% Model X, and 60% Model E production levels for S and X would come in at 83,141 each and model E at 249,423 cars, 5 years from now.

At these sales levels gross revenues would total $9.97 billion for Model E at $40K average selling price (ASP),  $8.31 billion for Model S at $100K ASP, and $7.06 billion for Model X at an estimated $85K ASP. This total revenue figure of $25.34 billion would peg gross margin somewhere around 17.2% assuming 25% margins for Models S and Model X, and 12% gross margin for Model E. If SG&A and R&D expense total 10% of sales we are looking at $2.5 billion in additional expense.  under this scenario,  $4.35 billion gross profit would be reduced by an estimated $2.5 billion in SG&A and R&D to arrive at $1.85 billion in EBIT. A 30% effective tax rate, leaves us with $1.29 billion in 2018 net earnings. In this example, we are assuming a current share count held constant at 121.5 million for $10.62 dollars in 2018 earnings per share. We are estimating that ZV credits will be phased out completely but advances in battery technology and production methods will make up for this to hold the line on gross margins.

At current prices of $168 per share, under this assumption, investors are paying 15.82 times 2018 earnings. If you believed Tesla could continue to grow 50% in 2019 and 2020 when it is approaching and eclipsing the 1 million vehicle production level, you may be willing to pay $500 or more per share down the road. However, to see the company move up 300% from here, a lot has to go right over a significant period of time.

To summarize, this growth projection may represent a high hurdle that Tesla can meet or exceed in the next 1 to 2 years.  However, it may be very challenging to pencil Tesla in for 80% production growth 3-5 years from now. At Foundry Stock Review, we focus on profiling stocks by projecting earnings in the next 12-18 months. Request a free copy of our premium newsletter at or visit us at for more details.


Foundry Stock Review and its contributors have no positions in Tesla (TSLA) the security detailed in this blog as of 11/4/2013. Periodically, Foundry Stock Review or its contributors may initiate a position in a stock covered in this blog. If we do initiate a position in any security we cover prior to publication, we will disclose the position here in our disclosure. This stock disclosure is not a recommendation to purchase or sell any security.


Foundry Stock Review is an earnings focused investment newsletter. Foundry Stock Review, LLC is not a registered investment advisor and the data contained in this newsletter has been gathered from external sources and is believed to be accurate as of publication. The content of this blog is for information purposes only and is not a solicitation to buy or sell any individual securities.It is important that you consult with your investment advisor and tax advisor before making investment decisions. Past performance is not indicative of future results.

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