The Electric Car- Blow-up or Multi-Bagger?

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

My friend had put a deposit down and reserved a Tesla (NASDAQ: TSLA) Model S sedan, and I was invited to join him and his wife at the Tesla party in Los Angeles where they showed off their new design.  I'm no car aficionado by any means, seeing them largely as a utility, but when witnessing the Model S in person, I think it would be fair to describe it as a true work of art.

The fact that just looking at the Model S induced a reaction in me to buy it (which doesn't normally happen),  that they were pretty much the first electric car to market ("Who Killed The Electric Car" excluded), and the fact that the Tesla Roadster (its $100k+ sports car) has received rave reviews from its owners, makes it fair in my mind for Tesla to call their products the premier electric vehicles on the road.

the Model S- even better in person

Now, though an excellent start, just because you or I love a company's product does not necessarily make it a Grade A investment. Let's take a look at some of the challenges that Tesla faces:

Competition:

There's an excellent article about Tesla written by a fellow Fool, John Rosevear available here

One of the major points which John makes is that the big players in the auto industry have far larger infrastructures and production capacity than Telsa, giving them greater economies of scale, which enables them to operate on far lower margins. As the big boys enter the all-electric vehicle market, (not to mention the gas-electric hybrids being created by Toyota (NYSE: TM), and already available from GM (NYSE: GM) via the Chevy Volt, they have the capability of creating a comparable product, sell it more cheaply, and possibly put Tesla out of business.

His point is completely valid, and my counter response in Tesla’s favor is that by being first to market, the company has developed a “cool factor” amongst the elite who can afford to pay the extra money that is difficult to dismiss. I say this with a degree of prejudice because of all the cars I have ever seen, I would rate the new Model S to be easily the most beautiful I have ever laid eyes on, thus, and even from a cheapskate like me, would command a premium.

The fact is that Tesla has already developed a strong affinity from, I’ll grant, a narrow group of consumers- is part of the economic "moat" equation described by Warren Buffett. (Let’s hope, as I believe, these consumers are trendsetters.)

The New Paradigm:

Rosevear also argues that he is not certain the consumer would be willing to undertake the paradigm away from gasoline to electric, and would be much more comfortable sticking with what they know, arguing that the new plug in Prius from Toyota and the Chevy Volt would have an inherent advantage in bridging this gap.

I understand his logic, however, the rising price of gas has already shifted American consciousness towards more fuel efficient vehicles, exemplified by sales of the Toyota Prius and Camry booming up 18 to 20% this October from the previous year.

Here you have a chance to bypass gasoline altogether, and though it's unclear how much the electric bill will be in the short term, as we develop more renewable sources of energy (nuclear, wind, and more efficient solar panels) the price of electricity will decrease; I'm an optimist, what can I say. If the price per mile becomes cheaper than gasoline, the incentive to save money will shift society's paradigm of the automobile towards electric vehicles very rapidly.

What you might not know:

NRG Energy is attempting to setup electrical charging stations throughout the state of California.  Previously they were unable to make progress in this regard because of a lawsuit which has since been dropped.

Now that they have been green-lit, electric vehicle charging stations will be popping up left and right around California. Making it easier to charge a vehicle will certainly increase demand for them.

ALSO: Tesla will be setting up their own charging stations for Model S owners so you can charge for free at any of the stations. They also have a goal to bring the price down for the Model S to the $30k range with in 3 years.

Free fuel from Tesla has a way of rapidly cutting through any paradigm!

Management:

Tesla is the brainchild of Elon Musk, founder of Paypal (that's done pretty well,)  a workaholic combined with sheer genius.  I like to bet on entrepreneurs who attempt to create products that never existed that better society (Steve Jobs for one.) Is it rife with risk?  Of course, but that's the nature of investing and business.

Researching, Motley Fool analysts Lyons George and Isaac Pino at the start of the year were worried about the departure of the head of the chassis manufacturing department (column and video here).

Management turnover happens with every company, and I haven’t heard many more worries about it since then. However, it is good to be aware of the downtimes and not drink the Koolaid all at once.

The Coming Quarter:

Wall Street is looking for revenue of $51 million, and a loss of $0.90 per share.  Tesla will report supply chain issues which will inhibit their delivery of the Model S sedan to consumers who have left deposits with the company, which will invariably lead to cancellations.  The company expects gross margins to be negative for the quarter but turn positive in the fourth quarter of 2012.

Personally, I'm not terribly worried about the cancellations, the Model S sedan is so unbelievably beautiful I'm positive other consumers will be jumping at the bit to get one of the very limited initial supply.

Bottom Line: 

Tesla is a bold, and risky bet.  One cannot ignore the challenges and competition that the company faces as it attempts to do the near impossible and break into the heavily capitalized auto industry. What Elon Musk is attempting to do will take a near miracle to succeed.  However, with the beautiful design they have, the elite perception in the marketplace, and enthusiastic customers they have already attained, I truly believe they have a fighting chance.

If Tesla makes it through without having to recapitalize and dilute existing shareholders (another risk), this stock has the potential to be a multi bagger. At worst they have a brand that another company would love to own, and really great technology. I’d be proud to say I owned both the stock and the car, and have a buy order in at lower prices than now. 

Thoughts? Leave a comment below. 


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

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