The objective analysts on Tesla Motors Inc (NASDAQ:TSLA) is currently losing ground against the human emotion regarding the electric car company. One extreme opinion is grounded in the belief that Tesla will unavoidably fail, while the other extremists believe with all sincerity that the company is completely immune to any valuation issues. All the while, there are those who like to stir the pot and add fuel to the heated debate.

The discussion regarding Tesla reveals a key flaw in the human nature – confirmation bias. One extremist party will claim that they are victorious in the debate, but can the winner really attribute it to an objective analysis?

The silver lining in the situation is that the discussion about Tesla is not entirely devoid of objective analysis. The following will hopefully add to the objectiveness of the Tesla debate.

The Vehicle And The Business Model

Tesla currently only sells one electric vehicle, although it does have a few others in the works. The Model S is an exceptionally design car, both in aesthetics, functionality, and technology. The evidence pointing to this is plentiful – the car has won multiple awards and boasts numerous raving reviews.

Looking past the car, Tesla Motors Inc has grown away from the business model of the conventional auto producer. The typical push business strategic approach is first, manufacturers sell vehicles to dealerships at wholesale prices. The dealers then retail those vehicles at extremely narrow margins, gaining most of their revenue from their service centers.

Tesla, on the other hand, approaches its business with a pull method to sell its cars. The company completely bypasses the dealership middleman by fulfilling customer orders directly from its manufacturing center. However, the Tesla service centers currently operate at cost.

The old, push model has forces manufacturers to cut margins, which are around 3 percent to 5 percent, and focus instead on their forte – manufacturing – while leaving the direct selling to be handled by dealerships. The Tesla model contains the margins that other companies loss with their wholesale approach, and also limits inventory to levels that are absolutely necessary. However, this means that Tesla must take on the responsibility of managing the OPEX of Tesla stores and service centers.

Let’s compare Telsa against one of the largest and most established car companies in the country – General Motors (NYSE:GM). The electric car company has gross margins of more than 25 percent. General Motors has margins of just 11 percent. This signals a positive sign for Tesla’s business model, but there still remains a lot to be seen. Tesla has yet to report a positive EBIT, which makes it difficult to compare the two without the complete picture. The other issue with the Tesla business model is how it will function as demand goes up and down. Currently, demand for the electric vehicle exceeds production, but this case may not hold up in the long run.

It is necessary to understand large investments in research and developments. Roughly 13 percent of Tesla’s revenue is going into R&D, which means that there is the potential for high returns in the future. However, this is also a key reason why Tesla is not able to generate an operating profit.

Additionally, we must note the incentives for dealerships. They must sell cars that break down, or at least require maintenance in order to generate a profit. On the other hand, Tesla has aligned their incentives and business goals to be parallel with those of its customers. If a Model S breaks down, Tesla’s reputation as a car maker is damaged, the company does not receive any financial gains, and may see its future demand go down.

The supercharger network that Tesla is trying to build is another point of differentiation. The growing network will only charge Tesla vehicles, and is far ahead of other companies in scale and in re-charging time. This situation creates high walls for anyone looking to enter the market for long range electric vehicles.

Will Tesla Motors Development Into More Than An Auto Maker?

In 2006, Elon Musk, the founder and chief executive officer of Tesla Motors, wrote a plan that detailed the future scheme for the electric car company. One excerpt stands out due to the ambitious and revolutionary nature of the statement. Musk stated that the purpose of Tesla Motors is to help quicken the move of the economy from what is characterized as a mine and burn hydrocarbon economy to an economy sustained by solar electricity. Elon Musk believes that his company is the primary sustainable solution.

Given the fact that Elon Musk is also the founder and head of the management board of SolarCity (NASDAQ:SCTY), this statement does not sound like the purpose of an company that is bound by the automobile market.

More proof throughout the past 8 years point to the fact that Elon Musk is aiming to use Tesla and SolarCity to change not only the auto market, but the economy as a whole:

First, Telsa partnered with SolarCity by supplying batteries to SolarCity in order to power residential and commercial solar panel properties.

Second, the Tesla Gigafactory is expected to produce more lithium ion batteries by 2020 than the number of batteries produced all over the world in 2013.

Third, Tesla released all of its patents. It would be unwise to assume that this was just a charitable act. Tesla has made it clear that their goal is to be the igniter for the adoption of electric vehicles. The way to reap the most benefits from a broad adoption of electric vehicles is what Tesla is doing – building a massive battery manufacturing plant.

Any one of these points may not mean much by itself, but taken in together with the statement that Mr. Musk made, signal that the business has a plan greater than automobiles.

Tesla’s Growth And Valuation

Tesla’s production figures are continuously increasing, with a guidance of 35,000 units of cars to be shipped in 2014, and a rate of 100,000 by 2015. The outlook of the company’s long term growth is mostly dependent on the successful market performance of the Gen III, which is Tesla’s upcoming model targeted towards the mass market customer.

To place a solid number on Tesla’s valuation is near impossible on a comparative basis. The company is currently trading at 14 times more than its sales figures and its solid top line growth. Tesla is undoubtedly extremely different than other typical car producers. The industry average P/S ratio is lower than 1. Even with this limited context, most argue that the price of Tesla’s stock already has its high future expectations price in.

Conclusion

The electric car company’s success is dependent on the acceptance and adoption of electric vehicles, not the competition. On one end of the situation is the widespread acceptance of electric vehicles, which if it is the case, Tesla has a strong advantage. On the other end of the spectrum, the market for electric vehicles is already almost completely saturated, meaning that the investors of Tesla are in trouble.

Putting a definite figure on where Tesla and the market for electric vehicles fall between those two extreme situations is a challenge. While the biased and bold can place their money in the stock, others who wish to get a part of a sound investment should look elsewhere.

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