Is Tesla Overpriced?


It is common knowledge that Tesla (TSLA) is in a sweet spot, that its cars are heavy on performance and practicability, and that its stock price has train-wrecked bears and road-killed skeptics.

Existing and new TSLA investors know this, but will be eager to know what the future holds in store for them. The glass has broken, but is there a chink in the armor? So, let’s deep-dive into:

  • Tesla’s blockbuster – Model 3
  • Miles of range and price
  • Its battery technology, which is spoken about in hushed tones

Model 3

Of the $6,303 million Q3 2019 Tesla revenues, 85% ($5,353 million) are from its automobile business.

In Q3 2019, Tesla produced 96,155 cars, and of that 79,837 are Model 3’s. The production of Model S/X has dropped dramatically by 39% year-over-year. It’s a no-brainer that Model 3 is Tesla’s mainstay as of now.

Tesla analysis 1

Musk has confirmed recently that the future of Tesla will revolve around Model 3 and Model Y (a compact crossover SUV to be launched in 2020). So for now, we have just Model 3 to work on for this analysis.

The problem here is that Model 3 is a mass-market product, and automobile majors that sell budget wheels earn low margins, say 10% or lower. Now, Tesla carries a cult image; so, will focusing on the mass-market segment impact the hype surrounding it? It’s too early to tell, but competitors have started breathing down Musk’s neck.

Let’s dive deeper.

Miles of Range & Price

There’s been a lot of talk about Tesla’s secret sauce being its batteries, and there’s been concentrated speculation about how its cylindrical lithium ion batteries are secretly assembled.

In the EV industry that is aimed at the mass market, it should all boil down to the customer reconciling his emotions attached with owning a solidly performing status symbol like Tesla with the balance in his bank account.

Tesla is gradually moving towards producing cars for the average Joe, and when it comes to batteries and miles of range, the average customer will almost certainly compare the price and battery performance with other models before making a decision.

The standard Tesla Model 3 which does 150 miles/charge is priced at  $33,690, while the long-range version, which does 322 miles/charge, is sold for $42,690.

tesla analysis 3

Contrast this with the price of a Nissan Leaf S-Plus, which delivers 226 miles/charge and is priced at $36,550. Lower-end Leaf models that deliver 150 miles/charge are priced at $29,990. The Chevy Bolt EV that runs 238 miles/charge is also more affordably priced at $36,620. The bottom-line, therefore, is that the competitors are already selling cheaper cars with comparable miles of range.

tesla analysis 4

Tesla clearly is under pressure from the competition, which is why it said (in its Q3 2019 earnings presentation) that its revenue dropped because of price adjustments made in Model 3 Standard range. This could also be one of the reasons why the company has set up a production facility in China.

tesla analysis 2

Will the average American prefer shelling out more bucks for a Tesla as time goes by and the competition gets better, innovative and more affordable? Will Tesla keep cutting its price to stay ahead of the competition? These questions will be answered in the near future, but they sure sound like niggles.

Battery Technology

There may be another forthcoming spanner in the works – and that’s battery technology. Musk is relying on Li-ion batteries, while other creative innovators like Bezos , Bloomberg, Branson, Jack Ma and Gates are working on making flow battery technology, which is greener and cheaper than Li-ion. On 18 Dec 2019, IBM announced a breakthrough in battery technology, which could render Li-ion batteries obsolete.

Technology keeps getting obsolete with time, but Musk has been placing all his bets on Li-ion batteries. It may be a good thing, but TSLA investors must closely track technological obsolescence in batteries.

Summing Up

Musk is a hotshot genius, Tesla’s cash flow robust and its stock price blazing high on the charts. Things look good as of now, but it does seem that the future will challenge Tesla. From competition in the American market to living with low margins to waking up to changes in battery technology – it’s not going to be easy. Rivian, another competitor, which is being termed a Tesla-killer, is expected to rear its head in 2020 with its electric trucks.

Competition in Europe too will heat up starting 2021. BMW’s i4 is slated to be launched in 2021, Mercedes’s competitor to Model 3 will be on the roads in 2022, and Audi will create a rival to Model 3 by 2023. Chinese EVs too are getting their act together and the mass EV market across the world will witness fierce competition.

Tesla charts

Tesla’s stock has zoomed up too fast and furiously in the last few months. It will be reasonable to say that the price has discounted many positive developments of the future and that the current price of $478 as on 10 Jan 20 seems overdone, given the shift in the company’s market focus. But then like John Keynes once said “markets can remain irrational longer than you can remain solvent.”

P.S.: For Tesla shareholders hunting for humor in this post, here’s an analyst’s prediction on 18 June 2019 that TSLA will drop below $100.

1 Comment

Leave a Reply

Your email address will not be published.