This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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

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

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
TSLA $214.84 1.60%
AAPL $92.69 -0.59%
FB $119.49 1.40%
GOOG $711.11 1.40%
YHOO $37.23 0.79%


Chart of I:DJI
DOW 17,740.63 +79.92 0.45%
S&P 500 2,057.14 +6.51 0.32%
NASDAQ 4,736.1550 +19.0610 0.40%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs