Tesla Motors: The Dream Materializes

Carlos is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I must confess to being a bit of a futurist. Technological trends and developments excite me, as they make modern life more convenient and impressive. I mean, think back for a moment. 2006 was merely 7 years ago; yet back then we had:

  • No iPhones or iPads.
  • Facebook and Twitter were just getting started.
  • Netflix allowed consumers to get movies at home, but only via mail delivery.
  • Amazon was far lest impressive than it is today.
  • People still drove Hummers.

For people of my generation, this feels like the dark ages. How did folks survive back then??

Today, it would seem that we're heading towards a more advanced and greener (i.e., energy efficient and eco-friendly) future, though we admittedly have stumbled along the way.

For me, one of the clearest signs of our advancement is the slowly growing viability of electric vehicles (EVs), spearheaded by Tesla Motors (NASDAQ: TSLA).

Founded by Elon Musk, the mastermind behind SpaceX and co-founder of Paypal (and probably the most awesome entrepreneur in the world after the glory of Sir Richard Branson), Tesla Motors designs, manufactures, and sells electric cars to consumers. Currently, there are only two car models available: the Tesla Roadster sports car and Tesla Model S luxury sedan, though the Roadster is no longer being produced.

"He simply changed the facts"

Unfortunately for Tesla Motors, they've had something of a bad month. On Feb. 8, The New York Times published a scathing review of the Model S. Apparently, the Times reviewer was taking the vehicle on a test drive when the vehicle shut down and had to be transported on a flatbed. Elon Musk responded with a data-loaded blog post that insinuated the NYT reviewer had conspired to make the test fail. Musk's exact words:

When the facts didn’t suit his opinion, he simply changed the facts. Our request of The New York Times is simple and fair: please investigate this article and determine the truth. You are a news organization where that principle is of paramount importance and what is at stake for sustainable transport is simply too important to the world to ignore.

The Tesla Motors fanbase (which is apparently quite avid) fired back at the Times. The whole debacle looked more like the usual online political internet fight rather than the usual corporate PR debacle. By now, it has been more or less settled.

More recently, on Wednesday Feb. 20, Tesla released it's quartlerly earnings report. It wasn't a bad quarter, but neither was it close to "good:" there was an EPS loss of -$0.65 compared to the -$0.53 or so that analysts were expecting. Revenue came in at around $306.3 million, which beat estimates by around $7.4 million. Deliveries were 2,400 for the quarter and about 2,600 for the year, below company expectations.

As a result of all this news, the comapy's share price went off a cliff, from around $39 per share to $34-$35 per share, triggering a short sale circuit break. It didn't really help that the guys over at Bank of America saw fit to downgrade Tesla's stock to "Underperform" with a price of around $30. Nor the fact that some people who put down $5,000 to reserve a Model S were suddenly having second thoughts.

Why would you ignore the shareholder's letter?

I can understand why people would dump shares based on these results, bu doing so ignores some very good news that came out with the earnings report. In the shareholder's letter, Musk delivered some things that investors had been looking/hoping for: revenue had surged 500%, he set a framework for getting gross margins up to 25 percent, and he swore that Tesla would actually bring in a proft next quarter. He also addressed some topics in the conference call with Wall Street analysts, including:

  • Heavy marketing in Europe will begin, followed up by the same in Asia.
  • Costs were excessive last quarter due to paying a lot of overtime last quarter in order to meet shipping commitments. Manufacturing is being tuned to scale this down and dismissing part-time workers.
  • Costs are also expected to be lowered by updating it's logistics department. At one point, Musk mentioned: "And when you fly something, it can cost as much 10 times what it costs to ship it by sea or rail or truck, particularly if it is heavy. And so, we had to do some dumb things like fly tires from the Czech Republic like (indiscernible) that was, like one of the -- I want to punch myself on the face for that one."
  • Lower supplier costs are expected now that production is stepping up.
  • Expansion of Tesla's network of free-charging stations along highways is set to continue at a solid pace.

So the company is looking forward to consolidating, establishing itself, and expanding. The part about marketing heavily in Asia is particularly exciting, since Tesla faces little competition there at the moment. In fact, there is only really one major homegrown company in China that manufactures EVs: Kandi Technologies (NASDAQ: KNDI).

The Eastern Threat

Dealing with Kandi could be difficult. The company used to be a a producer of ATVs, UTVs, and yes, go-karts. However, that is rapidly changing, as China has inmense interest in producing electronic vehicles. It makes sense too: the country wants to avoid being as reliant on oil as practically every other country in the world is. Moreover, Chinese citizens (and their leaders) are very conscious of the fact that their country's air pollution is quite bad. Switching over to electric vehicles would go a long way in cleaning up the environment and avoids having to rely on the price of oil.

This is where China's political advantage (read: being a oligarchical dictatorship) comes in handy, as the government can push it's EV agenda while ignoring ordinary market forces. This provides various benefits for EV companies: aggressive public initiatives, subsidies, and so forth. Kandi, however, is possibly the only Chinese EV manufacturer that has the potential to become it's own truly formidable force, given enough government support and EV production at an affordable price. As a sign of it's promise, it recently announced a joint venture with Geely Auto (Geely is the Chinese company that bought Volvo from Ford and currently seeks to acquire EV maker start-up Fisker, though competition is stiff).

So Kandi is a threat on the the horizon, but so far is restricted to China. At home, the situation is rather different.

The war at home

Here in the US, the EV trend (just like the environmental trend) hasn't caught on as strongly as it has elsewhere (that means you, Europe). Nonetheless, it is a growing market, as consumers gradually seek to wean off of high oil prices. Still, though, the preferred vehicle is a hybrid (which, as the name implies, uses both an internal combustion engine and an electrical engine) rather than an all-electric vehicle. Tesla's main domestic competitor would probably be General Motors (NYSE: GM), which possesses the Chevrolet Volt. The Volt has been voted by the EPA as the most fuel efficient vehicle, and sales have been rising in recent years, probably due to high gas prices. However, sales fell significantly in the last 3 months, due to a number of reasons.

This is good news, as it leaves a hole for Tesla to fill, and presents investors with a unique opportunity. Now is a good time to invest in some shares of Tesla, for the long-term OR the short-term, especially given that the company just dropped a good 12.5% or so in the past 5 days, but still expects a profit (finally) next quarter.

My opinion? I'd certainly jump in. When the automible first came out, it took a while for costs to drop to the point it could be truly affordable for the middle class. This is a natural part of business. I expect the same to happen here for Tesla's cars. Now is as good as any other time to invest in the future of automobiles.

Halios has no position in any stocks mentioned. The Motley Fool recommends General Motors and Tesla Motors . The Motley Fool 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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