The Future Is Now for Automakers - The 2 Reasons Why Tesla Is a Strong Outperform
Jay is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tesla Motors (NASDAQ: TSLA), founded by serial entrepreneur and wunderkind Elon Musk of PayPal, SolarCity, and SpaceX notoriety, made headlines in 2012 when the company’s newest product was unanimously voted Motor Trend’s Car of the Year. But dig a little deeper and it’s clear that Tesla is not just a car company — it is a modern, Silicon Valley-styled tech company disguised as a car manufacturer. From design and technology through to distribution and manufacturing, Tesla is truly differentiating itself as the leader in product design, innovation, and vision.
While not competing for worldwide dominance (yet), Tesla is a newcomer to an industry defined by incredibly large, slow moving organizations. To understand and value the level of innovation Tesla is bringing to the market, we must first establish an appreciation for the stodginess of the status quo.
A lot has changed in the auto industry in the last 5 years. The stodgy, bureaucratic, and arguably complacent US manufacturers—General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler—were jolted to life in the 2008 credit crisis and subsequent Great Recession. Their turmoil has been well-documented—from the controversial (and successful) private equity style government intervention at GM, to the bankruptcy of Chrysler, to Ford mortgaging the company to stay in business, to the eventual rebound and recovery following “Cash for Clunkers.”
Foreign manufacturers felt similar pains but for different reasons. Unprecedented product recalls at Toyota (NYSE: TM) tarnished what was the gold standard of manufacturing. Followed shortly thereafter by significant supply chain issues in the wake of the massive earthquake, tidal wave, and Fukushima nuclear disaster in March of 2011. But just like the Americans, Toyota eventually regained its footing.
After recovering from such constant turmoil, the big auto manufacturers would likely prefer a few years of steady growth and “business as usual”. Their stocks have recovered, revenue has rebounded, and the three largest manufacturers by market share are all back to profitability.
Product lines have been refreshed, but the results fall well short of revolutionary. Certainly a modern Ford Fusion has better fuel efficiency than equivalent models did in 2008, but touting voice controlled Bluetooth (ala Siri) as an innovation is a bit of a stretch. Higher end brands such as BMW, Audi, and Mercedes are doing a better job at product innovation than the big players, but due to consolidations and industry economics, these high end brands are more often than not divisions of much larger, stodgy corporations that share parts, technology, and oftentimes management.
And even still, the innovations in the luxury brands are more like improvements around the edges, not serious attempts to reinvent the game.
The market is changing, consumer expectations and demands have been elevated, and the big manufacturers are under attack once again. Not from external forces, but from truly revolutionary products made by modern, technology driven companies, most notably Tesla.
To be clear, it will be a long time before Tesla challenges Ford, GM, or Toyota for a position at the top of the worldwide or even US market share chart. Tesla is a niche player with a revolutionary product demonstrating what is possible with today’s clean energy technology. The success of an investment in Tesla today will not be determined by overall global market share, per se—it will be determined by continued product innovation, continued market acceptance measured by steady revenue growth, and continued leadership in the technologies that make the Model S so revolutionary.
Reason #1 Tesla will outperform – the Model S’s best-in-class technology, performance, and design
Tesla’s second design, dubbed the Model S, is an all-electric, zero carbon emissions supercar that brings the future of driving to today’s consumer. Sporting a 5 Star safety rating, a top speed of 130 miles per hour, accelerating from 0 to 60mph in just 4.4 seconds, and with a range of 300 miles, the Model S is a performance beast that rivals BMW's, Mercedes', and Audi’s top offerings.
Most significantly, though, consumers are showing incredible demand for it.
At the end of the 4th quarter 2012, Tesla had a backlog of orders for the Model S in excess of 15,000 reservations. Fueled by the press of the Motor Trend Car of the Year award and with the data to back up the car’s incredible performance, Tesla has rolled out a modern (and, relative to the rest of the auto industry, unconventional) distribution channel of retail stores. Tesla “dealerships” are more similar to an Apple Store than the Ford dealership on an acre of land off of the highway in your town. And similar to Apple, this allows Tesla to manage and own the entire customer experience.
Tesla is not limiting itself to retail sales either. Through partnerships with Daimler and Toyota, Tesla is licensing its battery and powertrain technology to other manufacturers in need of an electric or improved hybrid product. This diversifies Tesla’s income streams, validates and further establishes the company as the leader in the technology.
And the financial results prove the model is working. Tesla’s Q4 revenue at $306 million was 500% higher than Q3 . Gross margins improved from (17)% to 8% and are expected to rise to upwards of 25% in 2013. Profitability should come in 2013, as the upfront expenses for manufacturing tooling, R&D, and capex will reduce sharply as the company shifts from development to production. December 2012 was, in fact, cash flow positive.
As Tesla enters markets with a new “retail” location, they soon follow with installations of “Super Charger Stations” on primary interstates or highways in that metro area. These Superchargers are capable of charging about half the battery of a Model S in only 30 minutes (which compares with overnight charging of prior electric vehicle technologies).
The Super Charger network is an obvious key to Tesla’s future. The electric car industry will only see adoption if using the product is simple and convenient. The result is a chicken or the egg dilemma; a dilemma Tesla is solving by choosing both. The competition has chosen instead to do nothing, rather than investing the capital in infrastructure to enable the electric car market to grow.
Reason #2 Tesla will outperform – Americans love SUVs
The combination of the Model S’s success and Tesla’s investment in infrastructure has propelled the company into the nation’s conscious. Tesla’s first product, the Roadster, was a viable product that saw some success; it could almost be viewed as a proof of concept. Tesla followed with the Model S, which reset expectations for what a car could be. Slated for 2014, Tesla is now preparing to launch their 3rd design, a cross over SUV.
Known as the Model X, this product will propel Tesla into the SUV market at a time when volatile gas prices and uncertain economic prospects are driving many borrowers to smaller, more fuel efficient vehicles. The Model X is positioned perfectly to capitalize on this trend. Free from the negative reality of gas guzzlers, the Model X offers the luxuries, size, and safety of an SUV without the “pain at the pump”.
And the proof is in the numbers. After the public unveiling of the Model X, Tesla received over 500 reservations for the car in the first 24 hours it was available on TeslaMotors.com. American's love SUVs, and the Model X gives them a product with all of the benefits without the costs to fill it up.
The concept of well-made electric cars with available infrastructure to support them on the roads has been proven as viable. Tesla has established itself as the market leader in electric car innovation, design, and manufacturing. Entering the SUV market with the Model X presents a huge market with a clear competitive advantage over similarly sized and priced offerings. Tesla is trading today in the mid $30s, just off from its all-time highs; the company should turn profitable in 2013 with the continued market acceptance of the Model S and dramatically increase sales in 2014 as the Model X comes online. These two in combination make now the opportune time to invest in Tesla.
jayhjenkins has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford and 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!