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Making sense of Tesla: An investor's guide to a unique company

Part 4
Making sense of Tesla: An investor's guide to a unique company (Part 4 of 7)

The only luxury battery vehicle: How large is Tesla’s market?

Tesla’s potential market

Tesla (TSLA) is the only seller of luxury battery electric vehicles. Tesla is selling luxury and battery power. Logically, as Tesla’s market share increases, it’ll take share out of the luxury automobile market. There are only so many people globally who are able to spend more than $60,000 on a vehicle. It’s a sub-segment of this global population that’s going to prioritize the battery electric vehicle and Tesla’s other brand equity to choose to buy a Tesla.

Market Share Leader - Large LuxuryEnlarge Graph

As we can see from Tesla’s investor presentation, Tesla compares its offerings to large luxury vehicles. In the first half of 2013, Tesla sold 10,000 vehicles. The group Tesla was comparing to totaled approximately 31,000 in the first half of 2013, and projecting out by doubling would get the group to approximately 60,000 units in the year. Tesla isn’t easily pegged to the small grouping it’s basing its sales on. For example, BMW sold 56,000 Series 7 automobiles in 2013, according to the BMW Group’s 2013 annual report. This is in the context of over 1.6 million vehicles in the year. Series 7 is a niche vehicle and a 5-Series can pass $60,000 when well equipped.

Tiny Tesla, in terms of numbers

Luxury brands, including Audi, BMW, Mercedes Benz, Jaguar, Land Rover, and Porche, were less than 10% of the U.S. market in 2013, according to company filings. Adding Lincoln and Cadillac would get one over 10%. Let’s assume 10% of the U.S. market is luxury, with price points north of $50,000. The U.S. market was 15.5 million automobiles in 2013. Rough math would put the number at an approximately 1.5 million vehicle market. Yet Tesla is projecting production to be approximately 35,000 vehicles in 2014. This is still a niche market.

Prius to Mazerati

An employee recently commented to me that the trade-in lot ranges from Priuses to Mazarattis. As we saw in the prior article of this series, electric and hybrid vehicles grew over 60% from last year, according to the Electric Drive Transportation Association. As we saw in the prior article, even if this is an approximate 3% market, if it’s growing at 50% percent per annum, it will be a significant market by next year, as the electric and hybrid market is greater than 5%.

So growth is there. Let’s look at Tesla’s differentiated distribution model in the next part of this series. Spoiler: Tesla does things differently from General Motors (GM), Ford (F), and Toyota (TM).

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