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A long, hard road ahead

3 June 2013 By Antony Currie

Chief Executive Elon Musk has to sell 540,000 Tesla vehicles a year. At least that’s what may be needed for the electric automaker to be worth $43 billion, according to a Breakingviews calculator. Reaching that stock market valuation by 2022 is one target in Tesla’s rocket-scientist founder’s long-term incentive plan. Hitting that and 10 operational targets could, on simplified assumptions, bag him up to $1.8 billion.

At first blush, that market capitalization may not seem such a stretch. After all, it’s nearly a decade away, and it’s only about four times what Tesla is now worth. And the company is only expecting to sell around 35,000 cars this year. The challenge is that having tripled in price this year, the company’s stock already bakes in an awful lot going right. At a price that’s 33 times expected 2016 earnings, shareholders seem to have got well ahead of the reality.

And by 2022 Tesla should be a more mature company attracting less growth-oriented valuation multiples. By then, it will probably cover much of the auto market with at least three models costing from, say, $35,000 or so to $100,000 apiece, not just one high-end, high-tech sedan aimed at wealthy early adopters.

Being generous, suppose that in 2022 Tesla trades at 15 times expected earnings for the year. To reach the $43 billion market cap, it would have to earn $2.9 billion in profit. Assume a generous pre-tax margin of 12 percent – implying that falling technology costs will offset the negative margin impact of selling lower-priced models – and a standard 30 percent tax rate, and Tesla’s revenue would need to hit $34 billion for the year – 18 times this year’s expected top line.

Getting there would require selling perhaps 269,000 of its cheapest cars and around 135,000 each of the current Model S sedan or its successor and the planned SUV crossover model, for a total of over half a million vehicles – around a third of last year’s sales of BMW-branded cars. The number would be far higher if valuation multiples and margins were slimmer. The German luxury automaker took almost a century to get there. If Musk manages to hit his targets by 2022, he’ll have done so within 15 years of Tesla selling its first car – and he’ll deserve every cent of his bonus.


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