A Cool, Electric and American Car?

By Moustafa El Zanaty - July 3, 2012 | Tickers: F, TSLA, TM | 0 Comments

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During the financial crisis that gripped the country in 2008, the two industries hit the hardest were the financial industry and the American automakers.  One can argue that both fell victim to their own devices and I am sure some are still of the opinion that the Government should not have gotten involved in bailing these industries out.

If we look at the automotive industry in the U.S., it had been declining for years leading up to the meltdown and had a track record of releasing boring, inefficient and low quality automobiles.  The companies were bogged down by decades of bureaucracy and many of them had released bad car after bad car.  There arguably hadn’t been a visionary leader since Jack Welch in any of the American automakers.  Comparing them to the outstanding growth of companies like Toyota (NYSE: TM) whose focus on quality and reliability was the standard in the industry for years.  Toyota has rebounded well from the recall crisis they endured during 2009-2010 and relatively unscathed during 2008 when the big three went to Capitol Hill with their heads low and hands open.  

The rest is as they say history. All three have rebounded solidly and Ford (NYSE: F) led by Allan Mullaly has made a very impressive turnaround.  They have released cars that have actually excited customers and begun to improve their balance sheet.  Chrysler has done some impressive marketing recently and their super bowl ads announcing Detroit is back using rapper Emenem have been a huge hit.  What was lacking in these Automakers has been partially restored, but if they seem better off then they were before, keep in mind that it is hard to fall out of the basement. 

Looking at the American Automotive landscape, what company has created an Apple like buzz about its products?  Is there a company out there with a truly visionary CEO?  What segment of the auto industry is poised to grow in the next 10 to 20 years?  Tesla (NASDAQ: TSLA) is the answer to all those questions and its CEO Elon Musk has not only demonstrated visionary leadership but a Jobesque ability to grab headlines and make Tesla relevant in the news.  Now, I am not saying he is the second coming of Steve Jobs nor the automotive version, but he is the first person to make the electric car sexy.  Elon Musk is a charismatic leader, which doesn’t guarantee success by any stretch, but is refreshing in a business that especially in America became very boring.  Tesla’s recent release of the Model S was very positively received by the automotive industry and Wall Street as well.  We would all love to find a stock that is trading at a low price, is already profitable, has a first mover advantage and is ready to double soon after one buys in.

Tesla is not that type of stock; it is not profitable yet and still has some major hurdles to clear before it becomes entrenched in the highly competitive auto industry.  However, like Apple its products are sexy, cool, high tech and functional.  You would be hard pressed to find a so-called expert who 5 years ago would predict people would line up overnight to purchase an iPad, which is one of the most expensive tablets on the market.  This is where Tesla is now, it has just released its second car and the first model to be made completely in house.  It is priced in the upper range of cars as a fully loaded model S with the long-range battery will cost you over $100,000.  Looking at the evolution of the Tesla brand and its product offerings you can see the price is slowly creeping down and the functionality continually increasing.  The long distance battery has been rated for 260 miles of continuous driving before a charge is needed and the standard battery is closer to 160 miles.  The way tech has been moving it’s not hard to imagine a battery at a lower price having a range of double or triple that in 5 years. 

This is all to say that though there are plenty of risks to Tesla’s future it does have an immense amount of potential, and to use the Apple cliché again it could become the standard in electric automobiles.  At the price it is at right now we could see a jump of close to 50% in the 1 to 2 year time frame with the potential that Tesla can become a multi bagger over the next 5 years.  This will depend on how they can deliver the Model S and if they can fulfill orders in a timely fashion.  They already have an emerging power train business working with Toyota and Mercedes Benz which indicates that their technology is solid.  They have a cool brand that is quickly becoming the standard in electric cars with a CEO that has a vision of making Tesla into a long-term powerhouse.  These advantages position Tesla to succeed.       

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