It is Too Early to Invest in Tesla Motors

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

The auto industry is due for a true disruption.  Not a feeble attempt at holding on to the past with just enough change to create the perception that progress is made….hello Prius or Volt.

What I am talking about is a line up of cars that truly revolutionize the car industry.  Cars with sex appeal.  Cars that do not use fossil fuels and do not produce emissions, cars that accelerate and can hand with the BMWs, the Cadillacs, and the Audis. Cars that are classy and more than just an eco conscious image statement (sorry Prius owners).

Introducing Tesla’s (NASDAQ: TSLA) Model S. 

The Model S is the first 21st century car coming onto the market.  I love my cars.  I am also relatively environmentally conscious, but you will never see me spending a dime on a Volt or a Prius or any of the other horrendous “inventions” that their manufacturers dare to call cars.   If I am going to spend thousands of dollars on a car, I better enjoy myself every time I step into it.  The Model S may do that for me.  For the first time I am seriously considering getting an electric car as my next purchase.

Tesla has achieved the most difficult and critical task in business to be successful with a new product in an existing industry.  It is changing the way consumers see electric cars.  Early adopters are jumping in, evidenced by the ramp up to produce and deliver 20,000 units in 2013.  So far in 2012 they have secured over 13,000 reservations, with almost 3,000 new reservations in Q3 2012, a healthy increase of almost 30% from Q2 2012.

Having said that, I am not convinced that, despite all the impressive progress made by Tesla, it is clear skies and sunshine going forward.  I have big concerns:

Competition

If Tesla proves they have a rule-breaking product, incumbent auto manufacturers with much deeper pockets, will react fiercely. Tesla’s partnership with Toyota (NYSE: TM), the “green “ leader in the auto industry, may offer some protection, but will it be enough?

Market Prioritization

I would have selected the European Union, or a subset of the EU, as my launch pad.   I think that would give him a bigger chance to establish a beachhead in the auto industry, build scale, and enter the most competitive auto market in much stronger shape.  Adoption of Model S will be faster in Europe due to more friendly government regulations and a more environmentally conscious consumer.  A US first model is a high-risk approach.

You may think that an initial focus on North Western Europe is too small of a market?   That part of the world includes auto crazy Great Britain and Germany whose combined population adds up to over 140 million people.  The combined population of the US East Coast and California is about 150 million.

The Super Charger Network

When I drive my Model S, I really do not want to worry about finding a charging station.  Fancy getting stuck in the middle of New Mexico in August?  I do not want to have the limitations of my car determine the route I take to get from A to B. 

For Tesla to fulfill its potential, despite having the convenience of charging your car at home, it is critical that it will make charging a Model S is as easy as filling up my gas tank.   That is a huge undertaking.  Mass adoption of any 100% electric car, even if it as good and sexy and powerful as the Model S, will not happen unless charging the car will be as convenient and filling it up.  You are not going to spend $50,000 or $60,000 on a Model S to just drive around town, are you?

A practical solution would be that every gas station also has Tesla’s (or similar) super charging stations.  Either that is incentivized through government or Tesla goes in business with the likes of Shell, BP, and Exxon.  The latter option is quite unlikely, as the oil companies will not want to cannibalize their own core business: oil.

Despite a promising third quarter by Tesla and an upbeat outlook by management for the future, I believe Tesla will hit a wall in 2013 after the pool of early adopters has dried up.  If at that point Tesla proves they can come out of that hole, it becomes an investable business.

….then again, people said Elon Musk was insane when he said he would be the first private endeavor to launch into space


BEF1973 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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