Goldman Sachs (NYSE:GS) released a 53-page report June 16 analyzing the car business. A very small section of the report (one paragraph) lowered its price target for Tesla (Nasdaq:TSLA) to $84, sending the electric carmaker's stock tumbling 14%. It's come back some in subsequent trading. The question for investors--Is it time to sell? I don't think so. Here's why.
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That's not an easy task. In May I marveled at the fact the markets valued Tesla at more than Fiat (OTCBB:FIATY) despite the fact the Italian-American carmaker produced 200 times as many vehicles annually. This historic revelation came just four days after announcing its first profitable quarter in its 10-year history. In those four days, its stock jumped 49% to $83.24 per share. Tesla, who will deliver just 21,000 Model S vehicles for all of 2013, can't possibly be worth more than Fiat. At least that was the argument in May. Goldman's view, albeit two months later, essentially comes to the same conclusion. They would be wrong.
In a best-case scenario, Goldman sees Tesla producing 200,000 cars annually garnering a global market share of 3.5% in the entry and mid-luxury market with a 15.2% operating margin, which leads to a share price of $113. That's $7 below its July 17 close. And that's the best case. The worst case puts it at $58 with 105,000 cars produced in a year with an operating margin of 14.6% while the most likely scenario is 150,000 produced at a 14.8% operating margin.
I personally haven't seen the report but the numbers must be 3-5 years out. It's currently producing 400 of the Model S per week and should hit 800 by the end of 2014. In addition, the SUV Model X version won't hit production until late next year. Assuming 400 per week from it and 800 from the Model S, that projects to 63,000 vehicles in 2015. Add another 80,000 vehicles in a lower-priced version ($35,000 as opposed to $62,400)) of the Model S and Tesla hits 143,000 vehicles by the end of 2015. It's important to note that its assembly plant in California has a capacity for 500,000 cars annually. If it achieves the 143,000 number in 2015, I estimate its total revenue from car sales will be upwards of $6.5 billion, or about six times its current revenue.
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Back of the Napkin Valuation
Consider for a moment that Tesla currently has an enterprise value that's 16 times revenue and a market cap 13 times revenue. Push those multiples out to 2015 using my revenue projection in the previous paragraph and you get an enterprise value of $104 billion based on a market cap of $84.5 billion, which works out to $731 per share. Clearly its multiples will fall as revenues grow. However, if it hits $6.5 billion in revenue at anywhere near Goldman's operating margin forecasts, $120 per share, if available in two years, will be the deal of a century. Somehow I don't think that's going to happen.
Elon Musk is an innovator along the lines of Steve Jobs. He is building a technology company that just happens to sell cars. Tesla reminds me of Ford (NYSE:F) in the early days of the automotive industry; inventing as it goes. While I've never been especially fond of momentum investing and only pay for growth when it is at a reasonable price, I see Tesla as one of the few examples where I think I'd buy at almost any price because it's such a game changer.
Sure there are other car companies that are making electric vehicles like General Motors (NYSEGM) and Nissan (OTCBB:NSANY), but none who are building their own Supercharger stations across the United States and Canada. That service alone allows Tesla to charge premium prices for its cars. Ingenious. By the end of 2015, you will be able to take your Tesla anywhere there are people and be sure a 30-minute charge is available.
Goldman Sachs put GM on its conviction buy list. I like GM, but I find it hard to imagine that GM's opportunities are any brighter than Tesla's. I would use the current volatility to your advantage, picking up additional shares when its price drops 10% or more in a single day. Tesla's brightest days are still ahead.