Tesla Motors: defying gravity - FT.com Challenges facing electric car maker mean its share price will struggle to stay in orbit Space travel is one of Tesla Motors founder Elon Musk's passions. And with the electric car maker's shares rocketing 60 per cent since August, his two pursuits are converging. One reason for Mr Musk's success is that his electric cars are winning acclaim for their aesthetics and driving experience. But two questions remain for investors who want Tesla's share price to remain in orbit. Is there a legitimate market for a $70,000-plus luxury electric car? And can Mr Musk channel Henry Ford as well as he has channelled PT Barnum? The consensus is that Tesla will need to sell at least 35,000 of its flagship Model S sedans a year to be sustainable. In 2012, Tesla sold just 2,650 vehicles, mostly during the final quarter. However, the company has confidently predicted it will sell 20,000 vehicles this year, and its first quarter sales of 4,750 are just ahead of forecast. By comparison, BMW and Mercedes sold nearly 600,000 vehicles in the US alone in 2012. At the moment, though, the Model S costs more than comparable luxury models and the payback period from tax credits and petrol savings remains above five years. Tesla's much pilloried introduction of leasing options should help ramp up sales volumes. And with opportunities in Asia and Europe, where Tesla begins marketing in earnest later this year, 35,000 units looks even more plausible. The trickier question is how Tesla manages its expenses to achieve profitability. Mr Musk claims Tesla will be profitable this quarter and can reach a gross margin of 25 per cent by year end (fourth quarter 2012 gross margin was 8 per cent). The company is comfortable that it has finally figured out its production processes and can efficiently produce 20,000 cars annually. But it has spent more than expected on research and development, marketing, and capital investments, and that led to an earnings miss last quarter. Deutsche Bank estimates that 35,000 units will not be reached until 2015. Tesla shares now trade at above 10 times 2015 estimates of operating cash flow. With that kind of valuation based on results that are at least two years away, there is plenty of time for Tesla's shares to plunge back down to earth.