The Model S Isn't Worthy of a $20 Billion Valuation and That's OK


Model S. Source: Tesla Motors.

The Model S is not representative of Tesla Motors' mission. It's a means to the goal.

"In general, our mission is to catalyze the entire EV market ..." a representative from Tesla said in an email. Obviously a vehicle that starts at $70,000 isn't going to do the trick. The company is going to need a mass-market vehicle to catalyze the entire electric vehicle industry. Fortunately, that car is three to four years out, according to CEO Elon Musk.


The Model S might boast some impressive accolades, but it's not the company's bread and butter.

The plan
Tesla doesn't trade at a $20 billion valuation simply because the Model S is an excellent car. The market is forward looking. And when it comes to Tesla, the valuation is all about the company's aspiration for a mass-market vehicle. The Model S is simply evidence that management can execute on its ambitions.



Fremont factory. Source: Tesla Motors.

If Tesla's Model S really did convince the Street to value it at more than $850,00 per car, it would have to be a supercar with the ability to hover over traffic.

Obviously this isn't the case. The valuation is indicative of the Street's confidence in Tesla's ability to bring an affordable vehicle to market in mass production. This, my friends, is Tesla's bread and butter.

Here's a quick recap of the first three steps in Tesla's secret master plan:

  1. Build sports car
  2. Use that money to build an affordable car
  3. Use that money to build an even more affordable car

The affordable car
What do we know about this "even more affordable car"? A few things.

CEO Elon Musk has recently asserted that the company can bring it to market in as early as three to four years. Musk has also said that the car will be a bit smaller than the Model S (which is a large sedan). It will carry a price tag around $35,000 and should have about a 200-mile battery range.

Realistic?
The Model S is simply an avenue of approach for Tesla to get to its affordable car. And, so far, it's looking good. Sales are soaring, infrastructure is expanding, and demand is growing.

With the opportunity already priced in, the question investors have to ask is this: To what degree is this opportunity already priced in? Then, they need to compare that answer with their expectations.

Unlike the doubters, I sincerely believe that the company is hedging its success and has an excellent chance of producing an affordable car in the hundreds of thousands.

What's your take?

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The article The Model S Isn't Worthy of a $20 Billion Valuation and That's OK originally appeared on Fool.com.

Fool contributor Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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