(This is a highly-abbreviated version of a full SumZero report republished with the author's consent)
Contributor: Eric Kriegstein
Source: Private Fund.
Recommendation: Short Tesla (Nasdaq: TSLA)
Timeframe: 6 Months to 1 Year
Recent Price: $33.00
Target Price: $16.00
I believe this is an opportune time to short TSLA shares because risks significantly outweigh upside at the current price.
Tesla's market cap is now $3.5 billion, approximately 10% of GM (NYSE: GM), a company that sold 9 million vehicles worldwide in 2011. I am assuming that Tesla's best-case scenario for 2012 and 2013 is selling 4,000 Model S sedans in 2012 and 20,000 Model S vehicles in 2013 with 28% gross margins. Even under the most optimistic assumptions, Tesla is trading at a 2013 EV/EBITDA of ~ 13.3x and a 2013 EV/Sales of 2x.
Compare these multiples to Toyota (NYSE: TM), which has analyst 2013 EV/EBITDA estimates in the 7x range and EV/Sales of ~ .2x, or GM, with analyst estimates of 2013 EV/EBITDA at 1.5x and EV/Sales of .2x, and Tesla's pre-S production valuation becomes even more absurd.
A more likely base-case scenario is a slower ramp-up of Model S production with 2,000 Model S delivered in 2012 and 14, 000 Model S delivered in 2013. In this case Tesla generates EBITDA of - $204 mm in 2012 and $27 mm in 2013, and achieves profitability in 2014 by selling 20,000 Model S that year. For this base case scenario, let's assume Tesla trading at a 2014 EV/EBITDA of 10x is appropriate, which would value shares at ~ $14.
The worst-case scenario assumes Tesla Model S production/sales significantly underperform expectations, R&D and capex runs higher than anticipated and the company becomes a $0 in 2013. If we assign equal probability weighting to the best, base and worst case scenarios, Tesla fair value is ~ $16, or 50% downside to the current price.
Deutsche Bank analysts observed that Model S pricing is consistent with the large-luxury auto sedan segment, which totaled 275,000 vehicles in 2011. Tesla's 20k target represents 8% of this market, which is not insignificant. More worrisome is how the "value" of an electric sedan with an ASP of ~$80k from a start-up company will measure up against, say, a BMW 5-series which had an average U.S. transaction price of $50,600 in 2011.
Analyst consensus opinion is that Tesla will achieve near-flawless Model S production, meet or exceed sales targets in 2012 and 2013, and pave the way for the introduction of new models like the X and Gen 3 sedan. The company faces significant challenges in order to execute this strategy successfully, and there are tremendous broader risks such as underwhelming interest in electric vehicles.