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Why Tesla's Road Gets Easier, Not Harder, From Here

NEW YORK (TheStreet) -- Tesla  (TSLA - Get Report) is about to drop $20 a share at the opening, after reporting a first-quarter loss of nearly $50 million and breaking the first rule of a bearish market by saying its capital spending jump this year would mean short-term red ink on the free cash flow line.

Pity. If pigs get fat and hogs get slaughtered, now looks like a good time to be a pig.

You can call the 32% drop in Tesla from its $52 week high to today's likely opening anything you like: a needed correction to irrational exuberance, or yet another manifestation of the market's 14-year aversion to risk since the Internet bust (interrupted by the odd cloud or social-networking mania).

But what just happened is that the three- to five-year math for Tesla got remarkably sensible, at least if one thinks the upcoming Model X SUV will be as big a hit as the Model S sedan that will deliver 35,000 units this year and probably keep growing from there. Can you imagine Tesla at a price-to-earnings ratio of 30? You can actually see it pretty clearly from here. Some bubble.

Some numbers: At $180, Tesla stock commands 98 times this year's expected profits per share,  and 47 times projected 2015 EPS. These are numbers that exclude some charges under generally accepted accounting principles, it is true, but that's common for growth stocks. On that non-GAAP basis, Tesla made a $17 million first-quarter profit, or 12 cents a share.

Now, the Model X is coming on to the market in 2015, and CEO Elon Musk has said it will sell about as many units as the Model S, and at similar price points from $60,000 and up, depending on the battery the consumer chooses. The company has also said it will have a car ready in the $30,000-$40,000 price range by 2017, a market where BMW, Audi and Mercedes-Benz alone sell nearly a million units annually. And Tesla says its long-term target is for operating profits to be a midteens percentage of sales.

So, say they hit 100,000 cars a year by 2017, what happens? You've got at least 70,000 sales from the more-expensive Model S and Model X-a modest expectation, given that the company can make 1,000 sedans in its best weeks already. So even as the cheaper car kicks in, the average price point is likely to stay at more than $50,000 for some time.

That gives you $5 billion or more in revenue, and about $750 million in profit. It also assumes also either that the Model S and Model X sales barely grow from their first-year levels -- unlikely, given the mostly rave reviews for the Model S -- or that Tesla gets nearly shut out when it goes mass market, winning less than 3% of the A4/C-Class/3-series market segment. Again, not likely.

If just that base case happens -- not the smallest if, but not the biggest either -- Tesla at $180 is about 30 times 2017 operating earnings. With lots of different ways for earnings to beat this scenario.

How conservative is this model? Well, Tesla itself has said it hopes to be making 500,000 cars a year by 2020.

So after the stock does its swan dive this morning, take a deep breath. Teslas didn't just get less popular. Their medium-term economics didn't change. Only the stock price did.

At the time of publication, Mullaney held no positions in stocks mentioned.

Tim Mullaney writes on the economy, technology and health care. Follow him on Twitter @timmullaney or contact him at tim.mullaney@outlook.com

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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