Devo, interesting viewpoint in your post.
How is it that the M3 is going to be "running circles" around an S5?
First look at past history... The last M3 lost to the last S4 on the track. The M3 never ran circles over the S4, it was slightly faster and more of a drivers car but both the B5 and B6 S4s took the top spot in numerous magazines. Recently, the current M5 lost to the S6 on the track even though it was down 65bhp.
Fast-forward to today's facts:
The M3 weighs slightly more than the S5 AND this is with the Audi having AWD...
The Convertible (and heavier) RS4 beat the New M3
The S5 has more torque than the M3 (325ft/lbs vs. 295ft/lbs)
The S5 has better brakes than the M3.
The 335 is rated by BMW at 5.3 sec to 62 and best was 4.8 running tweeked boost for a magazine test
The S5 is rated by Audi at 5.1 sec to 62 and has posted a 4.5 and recently a 4.9 in nearly 100 degree heat.
Resale: Many magazines are already saying that the S5 will have excellent resale value, and there's no reason to think it won't hold it's value better than an everyday 335i at the very least. The S5 is easily better than the 335 but admittedly not as hard-edged as the M3. I do agree with you saying that the S5 won't kill the M3, this is left for the 450bhp/500 ft/lbs 5.0 liter twin-turbo RS5