A Challenge to Goldman on Tesla's Value

A Challenge to Goldman on Tesla's Value
Workers add seat belts to a Model S sedan at Tesla's assembly plant in Fremont, Calif.
Photograph by Noah Berger/Bloomberg

On Tuesday, Goldman Sachs came out and urged investors to curb their enthusiasm for Tesla, the electric carmaker and Bloomberg Businessweek cover subject whose shares had more than tripled this year.

Citing “sustainability of demand longer term” as a risk, Patrick Archambault, Goldman’s auto analyst, set a target price of 84, the average of three scenarios he saw playing out. That figure was way lower than Tesla’s previous close of just over 127. The shares responded by falling as much as 15 percent, the most in more than 18 months, on more than triple their average volume. Goldman has cred on Tesla; it was one of the banks that took the company public three years ago.

The very next day, Andrea James of Minneapolis-based Dougherty & Co. stepped up to the mic to counter the Wall Street giant. She wrote: “We ultimately believe that Tesla is a $300 stock at the factory’s maximum capacity, which we hair-cut to $200 for the execution risk.” (She previously had a $90 target). Tesla, she noted “makes the best product in an industry that does $1.5 trillion in sales. Just 2 percent market share on [its next-generation car] returns a $200 stock.”

James underscored that Tesla benefits from a technology company’s cost curve. Battery technology innovation is such that, in 10 years, the battery will be twice as good, at either half the price or twice the range. “For an electric vehicle,” she explained, “the cost to go a mile is tied to 1) electricity prices, which are regulated and tend to hold steady, and 2) performance of the electric battery pack, which is declining in cost over time. Thus, the cost to go a mile works in Tesla’s and the consumer’s favor. Win‐win.” James says that in the three years that she’s been following Tesla, the company’s cost per kilowatt hour has already fallen roughly in half.

She believes that Tesla’s Model S is on track to finish the year with gross margins of 25 percent—and without the benefit of regulatory credits. Not only does she see that margin rising, but she thinks that after 2017, Tesla will have scaled enough of a learning curve with the Model S to sell a lower-cost car (at $30,000 to $40,000) at a 25 percent margin. This Gen III Tesla, she writes, “should appeal greatly to younger people. We expect Gen III adoption to move even more quickly than that of the Model S. The Gen III will be an aspirational car for a new generation of car buyers.”

James’s analysis gets really interesting when she crunches numbers on the earnings potential of Tesla’s California factory. She notes that at its present configuration, Tesla can do 40,000 units per year there at peak efficiency—and 50,000 units per year if it kicks in a further $20 million to $40 million in capital spending. James believes Tesla can further expand the factory to be able to churn out 500,000 cars a year (which, she notes, would still represent less than 1 percent global market share on vehicles sold). “If we assume the stock is worth 20 times the [$15 a share] earnings potential of the factory,” she writes, “it makes Tesla a $300 stock and a $40 billion market cap.” For added intrigue, James notes that chief executive Elon Musk’s options are not fully vested until Tesla reaches a $43.2 billion market cap.

Tesla shares ended the day up 10 percent.

Take that, Goldman.

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