Still charging

1 Aug 2014 By Kevin Allison, Antony Currie

Tesla Motors is closer to justifying its sky-high value – or a third of it, at least. Chief Executive Elon Musk’s electronic carmaker, which had a market capitalization of $28 billion at the close of July 31, beat Wall Street estimates for the second quarter on Thursday and outlined an impressive production target of 100,000 vehicles by 2016 – almost three times what it plans for this year. Yet for all its success, and investors’ fetishization of Silicon Valley disruption, Tesla will only ever earn autoland returns.

Its bottom line remains anemic for now. Tesla’s adjusted net income was just $16.1 million. Tesla did, though, handily beat consensus estimates. Its gross margin improved slightly to 26.8 percent from last year, too. That, though, does not take account of research and development costs, whether for new vehicles or for a planned $5 billion “gigafactory” that will produce state-of-the-art batteries. Nor are administrative costs included.

More important is what happens in the near future. Musk now reckons the company will be able to crank out the equivalent of 100,000 cars by the end of next year. With sales of the iconic Model S sedan picking up in China and Europe and its Model X SUV due to hit showrooms in 2015, that’s not an unreasonable goal.

Say Tesla sells exactly 100,000 cars in 2016 for an average of $95,000 each, bringing $9.5 billion to the top line. Factor in the 11.6 percent pre-tax margin analysts expect that year and a 30 percent tax rate and Tesla would be earning just shy of $800 million. Rivals Ford and Daimler trade around 8 times that year’s earnings.

Tesla would still be a fast-growing company – it’s already working on a mass-market car it has dubbed “Model 3”. So it perhaps deserves to trade as high as 12 times 2016 estimated net income. That would mean it’s worth some $9.2 billion.

It’s not as rosy an outlook as shareholders currently have, of course. That appears based on the belief that Musk can massively disrupt a mature industry where engineering challenges present huge barriers to entry and make no mistakes while doing so. But neither he, nor investors who view Tesla as a totem for Silicon Valley-style disruption, can escape the economics of the car industry.


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