Tesla shareholders are pulling ahead of themselves

May 14, 2013

By Antony Currie

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Tesla’s shareholders seem to be assuming Chief Executive Elon Musk is infallible. The $10 billion U.S. electric carmaker is on a roll, last week recording its first quarterly profit and receiving the best score the Consumer Reports publication has bestowed on a car for six years. The company’s stock has since surged as much as 70 percent, leaving Tesla worth more than Fiat and Peugeot combined and trading at a whopping 27 times estimates for earnings in 2016.

Both top and bottom lines look set for rapid expansion now that production of the award-winning Model S is in full swing. Tesla’s revenue for the first three months of the year jumped 83 percent from the previous quarter as sales hit 400 vehicles a week. Consensus estimates for 2014 put sales at $2.5 billion, six times last year’s showing. By 2016, that’s expected to almost double again to $4.3 billion.

And Tesla’s gross margin is improving, reaching 17 percent in the three months to March. Musk predicts it will reach 25 percent in the fourth quarter. This measure does not, however, take research and development or general and administrative costs into account. Factor those in and Tesla’s pre-tax margin in 2016 is estimated at 12 percent.

That’s impressive for a car company – Ford’s North America division, for example, tops out at 11 percent in a good quarter. But it’s hardly in the same league as Silicon Valley fellows like Google, whose pre-tax margin was 28 percent last quarter.

To justify Tesla’s high 2016 valuation multiple, revenue would need to keep growing at a fast clip. Musk has plans to launch a crossover SUV followed by cars that may sell for around $45,000 – not far off half the price of some versions of the Model S. He may even develop vehicles in the $30,000 price range to attract more buyers. But that will take time and shift the company into a more cut-throat market segment where margins could suffer.

Musk has battled everything from skepticism about a manufacturing startup to tight cash flow and, most recently, attempts by traditional car dealers in Texas and Virginia to stop him selling vehicles directly to the public. His record so far is impressive. But Tesla’s stock price suggests investors are pulling ahead of themselves.

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