Can This Company Save Electric Cars?

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

During the last few decades, environmental impact of the petroleum-based transportation infrastructure, along with peak oil, has led to renewed interest in an electric transportation infrastructure. At a time when rising fuel costs are putting a financial strain on drivers throughout the UK, the cost of running an electric vehicle (EV) is one of the main incentives for people looking to make the switch.

Why go for an EV?
Making the switch to EVs is a lot easier than many people realize. With access to almost 500 convenient charge points throughout the North East, a growing range of vehicles to choose from, and a host of financial and lifestyle benefits to take advantage of, there’s every reason to give electric a go. Recent market reports say that the drivers of electric cars feel more comfort driving it than any other petroleum cars. It is also immensely cheaper. Nowadays, some of the renowned car companies are keenly interested to make electric vehicles. 

The Market View
With the market reporting less and less earnings each quarter, most buyers are hesitant. All the electric cars and gas-electric-hybrid models currently for sale in the U.S. have captured just 3% of total sales through the first eight months of this year. In August, only 4.3% of consumers shopping for a vehicle considered an electric car, according to a CNW research analyst. The EV industry, it seems, is plunging towards an untimely death.

 

<img height="800" src="http://www.evsroll.com/images/hybrid-electric-vehicle-sales-2001-2011_02.gif" width="350" />

(Source: Hybrid Car Statistics)

As of September, Toyota Motor Corp. (NYSE: TM) has announced that it will no longer widely sell its eQ all-electric minicars. The Japanese car company, which also produces the Prius hybrid car, said it had misread the market and how to meet consumer demand.

Nissan
Motors (NASDAQOTH: NSANY.PK) sold just 370 Leaf electric vehicles in the U.S. last month and only 2,103 so far this year To put this in perspective, the U.S. auto industry has sold almost 4.7-million vehicles this year. Also, a number of Leaf owners in Arizona say that the capacity of their vehicles’ lithium-ion batteries fell drastically after just a year of use, sharply limiting their driving range. 

Among the new entries are a gas-electric hybrid Volkswagen Jetta, the first hybrid sedan from the German auto maker; a plug-in hybrid Ford Fusion; electric luxury cars from BMW AG and Audi AG; and a Toyota Prius hybrid that can be recharged from the grid.

However none of the latest group of electric vehicles is offering enough features and reliability and an attractive enough price to move electric cars beyond niche status.

Ordinarily, with such hopeless situations, I would be the first to advice people to stay away, but Tesla’s recent success gives me some hope.

Why Tesla has captured the world's attention
Tesla
 (NASDAQ: TSLA) refuses to release monthly sales figures, as every other automaker does, but the company said it would deliver between 200 and 225 Model S cars by the end of the month. Even without confirmed Tesla numbers, plug-in sales in September totaled 5,539 cars, a stark contrast to all others in the field. That gives last month the highest total since modern electric cars went on sale in December 2010.

Shares jumped as much as 4.4% after the company priced its latest stock offering at $28.25 a share. That’s a surprisingly upbeat reaction to a move that ultimately dilutes the value of existing shares. With this latest spurt, the luxury electric car maker’s stock has nearly erased its nasty 10% selloff that occurred when it stunned investors with news production of its sleek Model S sedan is way behind schedule and that it would issue more stock to ensure it doesn’t default on its $465 million government loan.

Tesla has priced the 6.9 million shares in its latest follow-on offering at $28.25 each, less than 1% below the previous day’s closing price. The stock’s rally shows investors are confident the dilutive impact of the offering will be temporary. And at $28.25 a share, the offer remains well below the $37.43 average target price FactSet says analysts have on the stock.

So what is driving this optimism?
Several things. Tesla is a start-up enterprise developing new technologies. Lots of investors see it as an opportunity to play venture capitalist on a modest scale. It’s also got heavy government backing, which conveniently transfers some of the investment risk to taxpayers. And Goldman Sachs is underwriting the offering!

Also, Tesla has left no stone unturned to maximize user comfort for its cars. With development of 6-Supercharger (providing almost 100 kilowatts of power) stations and over 600 charging points across the city, drivers will be hard-pressed to get themselves stuck somewhere. 

The Gas prices are also a major incentive. According to the U.S. Department of Transportation, the average fuel consumption per passenger car is around 550 gallons per year. At a gas price of $3.50 per gallon, that makes $1925 per year for the average US car. Distance covered is 12,000 miles.

If you trust Tesla’s “40kWh will take you 160 miles” version (at 55mph), it would cost you $4.72 - or 2.95¢ per mile - which means you would pay $357 for your average 12,100 m/year instead of $1925. Even if you take a skeptical view, and consider only 80% of the power to be utilized, you still pay less than 1/3rd of the price you pay in gas. 

Based on this, company officials expect sales to surge 2013 onwards.

<img height="320" src="http://i989.photobucket.com/albums/af18/EamonKeane/rare%20earth%20elements/image023.png" width="600" />

(Source: Data Compiled by Goldman Sachs)

However, this is the idealized view. Even though it seems to be all good for Tesla, in reality, it is far from so. The company is still struggling to produce the expected rate of cars and its delay is costing it a heavy price. Although company officials state they are on the verge of solving this problem, I am not too hopeful just yet. This is the biggest concern faced by the company.

While the company publicly continues to get the benefit of the doubt, it still hasn’t turned a profit. And despite investor hope and devotion, they are not perfect.

Conclusion
So far, Tesla is the only power play to consider. Tesla’s fate hangs in the balance, and the whole EV industry’s fate rests on Tesla. It is a big responsibility, but I believe Tesla is up for it. The Company still has a long way to go, but it is headed on the right path. I remain bullish on Tesla as a small but growing force in the auto industry. And with Goldman Sachs backing it, I definitely wouldn't bet on Tesla to crash and burn, as some have suggested. In fact, it may be the one to rejuvenate the market.



Madhu60 has no positions in the stocks mentioned above. The Motley Fool owns shares of Tesla Motors. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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