Tesla in a Valuation Bubble?

Impressive gains for Tesla, but scaling up an issue

Tesla ($50.9 billion as on April 10, 2017) for a short period of time became the most valuable automotive company in US, surpassing GM ($50.8 billion as on April 10, 2017) and Ford’s ($45.1 billion as on April 10, 2017) market capitalization in the process. Investors flock to buy Tesla stocks after it announced record production of vehicles in the first quarter of 2017. On the hind-sight Tesla only produced a fraction of the vehicle GM produced in a month, displaying the underlining revolution in the automotive industry.

*Source: Company Filings, Counterpoint estimates.

Valuation skyrocketed but production is yet to

Even as Tesla produced and shipped only a fraction of vehicles as compared to the big three automakers of the US, the rise in valuation is little to do with it. The rise in valuation is based on the the company’s future potential. The company in its decade long existence has yet to make profit but the mammoth task for Tesla is to deliver on its promise of an affordable mass market electric car with its Model 3. The company will have to deliver 400,000 units of its cheapest model along with producing already popular Model S and Model X vehicles by 2020. It plans to deliver upwards of 100,000 Model 3 before 2017 to keep itself on track and avoid any backlog in deliveries. It will require Tesla to produce on average 50,000 cars per quarter by end of 2017. Tesla managed to produce close to 25,418 units in Q1 2017.

*Source: Company filings and Counterpoint estimates

Possible Bottle-neck and work around for Tesla

  • Model S and Model X have seen serious delays in launch, due to complex design and supply chain issues. The Model X production was delayed due to shortage of supply for the fancy falcon wing doors.
  • By keeping the Model 3 design to the minimal and using a single central console, Tesla has managed to reduce the risk of production delays due to complex design or lack of parts.
  • Further, Tesla needs to learn from Apple, on streamlining the suppliers and estimating requirements before-hand to reduce any production delays.
  • Gigafactory ideally has the capacity to provide sufficient battery packs required for Tesla vehicle manufacturing. It will be interesting to see with the increasing demand for the Tesla Powerwall and Model 3 launch nearing how Tesla will scale up the production of battery packs.
  • The company will have to rapidly ramp up the expansion of its Super Charger network. It will be vital for Tesla to maintain the same level of customer satisfaction with the increasing number of EVs on road.
  • Tesla will need another factory apart from the company’s Fremont facility to reach its manufacturing goals of 1 million cars per year by 2020. The current plant when operated by Toyota and GM produced 500,000 units per year at maximum capacity with Toyota’s years of experience.
  • As the company expands in markets outside US it will need another manufacturing base to cater the increasing demands of overseas markets. If done properly the new manufacturing unit can bring down the cost of production as well as shipping cost for Tesla.
  • Apart from production, distribution is also an issue that Tesla needs to sort out. Tesla has 108 stores across 28 states in US, it will not be enough to for the company to cater the needs of all the customers.

While Tesla prepares for Model 3 launch later this year, the competition is gearing up. GM has already beaten Tesla to launch Bolt EV an affordable mass market EV and a potential Model 3 rival. Any delay in Model 3 launch will only give competition the opportunity to move ahead of Tesla. The company will have to be smart in reaching its production goals by starting early delivery of Model 3 sedans. The company will have to smart with its supply chain, identifying demand of key components in order not to miss on its production goals. Ramping up the current charging infrastructure and expansion of stores to maintain customer satisfaction will also be on priority. If Tesla does these things right and on time, the company will gain major market share in the budding EV segment of the automotive industry.