Is Tesla Motors Really Worth $100 a Share?

Tesla's award-winning Model S. Photo credit: Tesla Motors

Can Tesla Motors really make it in the automotive mass market?

It's the question that haunts (or that should be haunting) current and potential Tesla investors. Tesla has already achieved big things, designing and building a great electric luxury sedan in the Model S, pictured above. It has also proven that it can sell enough of them to turn a profit.

It's true that so far the profit has been tiny, and the economic conditions in the U.S. quite favorable, but still: That's an enormous achievement.

But it's another big leap from there to becoming a mass-market carmaker - but it's a leap Tesla will have to make to justify anything like its current stock market valuation.

Can Tesla do it?

A closer look at Tesla's real mass-market plan
Tesla has never made a secret of the fact that its ambition has been to enter the mass market all along. CEO Elon Musk reiterated that plan in an interview with Bloomberg last week.

In that interview, Musk said that Tesla was working toward a vehicle that would be "half the price" of the Model S, would have a range of about 200 miles, and would come to market in "3 to 4" years.

The Model S starts at $69,900, not counting a $7,500 federal tax credit, and can be optioned up to a bit over $100,000. So at half of that price we're still talking something that's priced more like a BMW 3-Series than a truly mass-market compact car.

Tesla has already proven that it has a knack for upscale styling and for the details that matter to luxury-sport-sedan buyers. It's not a big mental leap to imagine a baby Tesla that delivers Model-S-like performance and luxury in a 3-Series-sized package, with a 200-mile range and a starting price around $35,000-$40,000.

It's also easy to imagine that Tesla, which will see its street cred burnished by more glowing reviews as it rolls the Model S out in Europe and Asia later over the next year or so, will be in a good position to sell a fair number of those compact sedans.

Buyers will continue to worry about the lack of recharging stations, but 200 miles' worth of range is enough for just about anyone to get to work and back home with plenty of extra electrons in the tank.

Long story short, it could do well for them. Or maybe we should say well enough? But how well?

The two big questions facing Tesla's hopes for mass-market volume
There are two big questions here, and we don't have easy answers to them yet. But the answers that suggest themselves should be troubling to Tesla investors.

First, will Tesla need to build more factories? It's a big question because car factories are expensive investments, both up-front and on an ongoing basis.

An all-new factory with all the relevant tooling for an assembly line or two could cost a billion dollars. That's just the beginning, because every factory adds to ongoing fixed costs, costs that Tesla - with just one factory so far, and that acquired on the cheap - has been able to contain so far.

The greater Tesla's fixed costs, the more cars it has to sell just to break even, no matter what the economy is doing. So far, the relatively strong U.S. economy has been very favorable for the Model S, but that won't last forever - and as Tesla expands globally, it becomes vulnerable to economic headwinds elsewhere, just like any other major automaker.

Fortunately for Tesla, its current factory is a big one, built originally for a joint venture between Toyota and General Motors . During the days of that joint venture, the factory was said to have an annual capacity of around half a million vehicles. Tesla should be able to ramp up to somewhere in that neighborhood without adding a facility.

That's a lot of Teslas. But even maxing out its current factory may be a challenge for the company.

Tesla is surrounded by huge potential competitors
The second question is one that some observers have been asking all along: What happens to Tesla's market if and when competitors enter it? Right now, Tesla doesn't have any direct competitors, but that's not because the major automakers can't compete with Tesla.

Instead, it's because the mass-market automakers have largely stepped away from full-scale battery-electric-car development in the last couple of years, preferring to focus on more promising advanced technologies like fuel cells, while using (and adding to) their battery-electric expertise by building plug-in hybrids and small EVs for limited markets.

The problem, from their perspective, is that battery technology hasn't advanced as quickly as many analysts were predicting just three or four years ago. Lithium-ion electric-car batteries are heavy, and expensive, and you need a lot of them to get good range, and recharging stations are few and far between.

Tesla "solved" those problems with the Model S by designing a big car with enough luxury features to justify a high price, and by announcing plans for a network of recharging stations. It's a good solution and the Model S has found a nice market - but make no mistake, it's still a tiny niche market by global auto-industry standards.

But if there turns out to be a larger global market, it wouldn't be very difficult for any of the mass-market automakers to build something similar to the Model S - and to leverage their much greater economies of scale to put heavy price pressure on Tesla. (Sure, Tesla has some patents that might need to be licensed or worked around. But Tesla didn't invent EVs, and several of the big automakers have EV patent portfolios of their own going back a decade or more.)

What happens then?

So how is Tesla worth $100 a share?
I don't think that the hard answers to either of these questions mean that Tesla is doomed. But I do think they call into serious question the extreme sales and profit growth assumptions that are now baked into Tesla's stock at $100 a share.

At current prices, Tesla's market cap is almost $12 billion. That's about a fifth of BMW's, and BMW sold 1,845,186 vehicles last year. Tesla expects to sell 21,000 in 2013, and BMW will probably sell around 2 million.

If we assume BMW's fat margins and BMW's brand strength and BMW's consistent top-notch execution can all be approximated by Tesla, and we discount a bit (because BMW also has a motorcycle business that we're not taking into account) we can say that Tesla has to pretty much max out its factory - or make about 500,000 vehicles a year - to be worth $100 a share at BMW's multiple.

Clearly, it's not close now. But can it get close?

Tesla recently told analysts that it expects to be making around 500,000 vehicles a year eventually, but there are reasons to be skeptical about its ability to get there.

Start with this one: Counting all of its variations (wagons, coupes, sedans, convertibles, et cetera), BMW sold 406,752 3-Series around the world in 2012. Given BMW's global brand cachet and the (well-deserved) excellent reputation of the 3-Series in particular, that's probably the extreme upper limit of global annual sales for the future baby Tesla we discussed above.

The realistic number of sales that Tesla could achieve in any given year is probably a lot smaller. That means that even when we add in Model S and Model X sales, and sales from a future next-generation Roadster, Tesla's going to have to execute to perfection and dodge competitors just to get close to that 500,000 number.

Given what we know today - and granted, things could change - it's very hard to see how it could increase sales much beyond that.

Second, GM is about to roll out a new electric car of its own, the Chevy Spark EV. It's a little tiny car with just 82 miles of range, but it's priced right: $19,995 after that federal tax credit, or you can lease it for $199 a month. It's not a Tesla, but it's said to be a hoot to drive as cheap small cars go, with a zero to 60 time under eight seconds.

GM probably won't sell very many, but think long and hard about what GM - which has been playing with electric cars off and on for about 20 years now, since the first EV1 - could do if there turned out to be a serious market for a battery-electric compact luxury sedan at $45,000 or thereabouts.

Or for that matter, what BMW or Volkswagen, or Ford, or Honda could do. Remember that this mass-market Tesla is still three to four years away, according to Musk, so there's some time to work on this.

If you add up all of the above, and you can still explain to me - with facts, and realistic assumptions - why Tesla's stock is worth $100 a share right now, then you absolutely should. Scroll down to leave a comment and share your thoughts.

Tesla's plan to disrupt the global auto business has yielded spectacular results - so far. But giant competitors are already moving to disrupt Tesla. Will the company be able to fend them off? The Motley Fool answers this question and more in our most in-depth Tesla research available. Get instant access by clicking here now.

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