Auto Industry to be Shocked by Tesla?
Patrick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I know you’ve probably about had it with cheesy electric car titles but at least it grabbed your attention. Tesla's stock has surged the last two days as the electric car maker was upgraded to a “buy” by a Wall Street analyst from Wunderlich Securities. Now usually I am not one to suggest a buy position after Wall Street and the major institutions jump on board but that isn’t yet the case. There are plenty of naysayers still doubting the young company. And for good reason too. Tesla Motors (NASDAQ: TSLA) has not yet made a profit and has not truly made a long-term product just yet. Despite this one condition I think that Tesla may be a great stock for the next 2-5 years.
For a quick history of the company it was founded in 2003 by Elon Musk of PayPal and SpaceX fame. The goal of the company is to create quality electric cars for the average person. They started this mission off with the high end and high performance Tesla Roadster. With a $109,000 price tag and capable of 0-60mph in under 4 seconds it isn’t your grandparents electric car. After selling over 2,000 and getting their name out there to the right crowd Tesla set its sights on a larger market. The luxury Model S sedan (you have to check out some of the photos) is their next step. It already has 8,000 pre-orders and is scheduled to ship this summer. Their next vehicle, based on much of the same technology, is the Model X, a crossover expected to come out in mid-2013. These are all building up to their goal of making a mass market, competitively priced, quality electric car which is still a few years off - though the announcement of a $30,000 model is due before years end.
So with an exciting story in the making is this all just a fairy tale that is never to be fulfilled? It comes down to three main questions. Will they stay on schedule and actually manufacture the cars? Will the cars sell? Will Tesla become profitable? First off the company has a number of debts and if they have many delays it may be too long before it becomes profitable and its creditors could swallow it. Luckily for Tesla they were able to buy a huge manufacturing plant in Fremont, California from Toyota (NYSE: TM). Toyota and GM went in on a joint manufacturing center in 1984 and had to pull out in 2010 due to cuts in production - giving Tesla a great facility at a bargain price. Additionally the plant is almost outfitted with all the equipment that Tesla needs to begin production. One of the main reasons that Wunderlich Securities upgraded Tesla to a buy rating was that they were impressed with the facility and Tesla’s progress.
As far as their ability to sell, the cars are priced at $49,500 after a tax break of $7,500 which puts them above a lot of consumers. Despite this price Taylor Anderson at SeekingAlpha writes that less than 1% of the top 1% in the US needs to buy a Model S for them to meet their goal of 30,000 in the next two years - even less if international sales are strong. Additionally for consumers looking for a high end luxury car this is not an unreasonable cost. It is less than a medium range Lexus of comparable quality.
Finally, and the most important: will Tesla Motors become profitable? They have yet to make a profit but Elon Musk expects to break into the black in mid-2013. Besides the Roadster, the company’s main source of revenue has come from the sale of powertrain components to larger companies such as Toyota and Daimler. It has to make a profit in its Model S and Model X vehicles to survive and the company plans to do just that. With 8,000 pre-ordered (on refundable deposits fyi) and a predicted 30,000 for the next two years, with the analyst from Wunderlich Securities saying that the car can “sell itself” and stating that he could easily see them selling 5,000 a quarter, the company seems set to reach its first goals. Once these cars are on the road and Tesla proves that it can manufacture in larger quantities more orders will come in and the stock will likely follow in the footsteps of the company’s success.
Yes there are a number of questions Tesla has yet to answer: will electric cars gain in market share, do American consumers really want electric cars, will a large company come in and strangle them, will they be overtaken in technology by another company. But Tesla is planning on answering these questions through action. The company has begun to build a great reputation and its visibility is growing daily. The Chevy Volt from GM (NYSE: GM) has been trying to beat out Tesla but they have not been met with much success. Another supposed competitor, the Toyota Prius, isn't currently even in the same market with Toyota shooting for lower end consumers.
With some amazing vehicles and technology, a passionate management, and a dedicated CEO as one of the major shareholders, Tesla Motors is out to prove the doubters wrong and I think they have a shot. Not only do I think they have a shot but I think it could be a great opportunity for investors if they get in now. The company makes an environmentally sustainable product but it has not yet proved that it is fiscally sustainable and until then it will understandably be a gamble that everyone is not willing to take. If you are interested I encourage you to do some more research (Fast Company did a great overview of the company), take a look at Tesla’s website and their cars, maybe even try to visit a dealership, and make an informed and independent decision.
Motley Fool newsletter services recommend General Motors Company and Tesla Motors . The Motley Fool has no positions in the stocks mentioned above. Patrick Gray owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.