By Kevin Donovan

(By Kevin Donovan) Yesterday we recommended buying Tesla (TSLA), the electric car manufacturer, remarking that the sharp decline earlier in the week presented an opportunity to capture the future value we see at a significant discount.
To recap, Tesla disclosed Tuesday that it had fallen behind in production, primarily due to problems with suppliers, and it issued new shares in a secondary offering to meet equity requirements in debt covenants. The pricing of that 6,925,740-share offering was announced today at $28.25 per share. With that obstacle successfully hurdled, we turn our attention to what we consider the fair value of this rapidly growing company.
Our discounted cash flow model yields a true value of about $48 per share, some 65 percent higher than the current price of about $29.
Assumptions, admittedly on the rosy side, include free cash flow growth of 20 percent per year beginning in 2013 through 2017, a cost of capital of 10 percent and a terminal growth rate of 5 percent.
In the base year of 2013, we estimate gross profit of $410 million, based on the average estimate of $1.64 billion in revenue and Tesla's expectation of a 25 percent gross margin. We think the margin estimate is conservative given the 36 percent gross margin achieved in 2011, the last full year of results.
We then estimated operating costs, giving credit to the leverage we see built into the business ramp, to arrive at our free cash flow estimates, growing to more than $200 million by 2017. We acknowledge this forecast is aggressive.
But there is little doubt, in our view, that electric cars will claim an increasing share of the automobile market, and Tesla's Model S Roadster is, by all accounts, a superior entrant in the space. The Model S starts at $49,500, and Tesla says it expects to deliver 20,000 of the vehicles next year. We think the target is eminently achievable if the company solves supplier issues and delivers fast enough to prevent customer order cancelations.
After all the recent sturm and drang, Tesla shares are little changed year-to-date. We think the stock is a bargain at current levels and recommend purchase for investors comfortable with higher than average risk.