by Neal Dikeman, chief blogger Cleantechblog.com
Since it’s launch, cleantech darling Tesla (NASDAQ:TSLA) has delivered huge revenue growth in the electric vehicle market. With a market cap of over $20 billion, it’s more than a 1/3rd of that of the massively higher volume GM or Ford. Largely the market cap has been driven by phenomenal growth numbers, 60% YoY revenues last in 2014, and the company forecasts 70% increase in unit sales YoY in 2015.
But let’s take a deeper look.
The Company trades at 7.5x enterprise value/revenues, and 26x price/book. At the current market cap, it needs to deliver the same revenue growth for another 4-5 years before normal auto net profit margins would bring it’s PE into line with the the other top automakers. Of course, that assumes no stock price growth during that time either! Our quick and dirty assessment test:
Take 2014 revenues, roll forward at the YoY growth rate of 60%. Take the average net profit margins and P/Es of the major autos (we used two groupings, 2-3% and 20-25, and 7-8% and 12-17), roll forward until the PEs align, see what year it is (2018-2020). That’s our crude measure of how many years of growth are priced in. And it puts Tesla at between a $20-$50 Billion/year company (7-15 current levels) before it justifies it’s current market cap. Or c. 300,000-1.5 mm cars per year depending on price assumptions. Up from 35,000 last year.
Does it have the wherewhithal to do that?
Well, looks awfully tight. The numbers technically work, continued growth will cure a lot of ills. But while nominally EBITDA positive now, the company has been chewing cash in order to sustain future grow. 2014 burned nearly $1 billon in cash in losses, working capital and capex to anchor that growth, almost as much in cash burn as the company delivered in revenue growth.
Positive progress on working capital in 2013 disappeared into huge inventory and receivables expansion at the end of 2014, and interest on the new debt for the capital expansions alone chewed up 10% of gross margin, while both R&D and SG&A continue to accelerate, doubling in 2014 to outpace revenue growth by more than 50%.
The cash needs this time around were fueled by debt, which rose over $1.8 bil to 75% of revenues. Overall liabilities rose even more. Current net cash on hand at YE was a negative half a billion dollars, seven hundred million worse than this time last year.
The company will argue it is investing in growth, and you can see why it better be. With almost every cost and balance sheet line currently outpacing revenue growth, at some point a company needs to start doing more making and less spending.
So yes, continued growth outlook is still exhilarating (depending on your views of the competition and oil price impact), but the cost to drive it is still extremely high. I think we will look back and see that 2014 and 2015 were crucial set up years for Tesla, and the really proof in the pudding is still probably 24 months in front of us. And my guess is Tesla will be back hitting the market for equity and debt again and again to keep the growth engine going before it’s done.
The author does not own a securities position in TSLA. Any opinion expressed herein is the opinion of the author, not Cleantech Blog nor any employer or company affiliated with the author.