Tesla Motors: An Electric Future

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

Is the way we commute about to undergo an industry transformation? 

Tesla Motors (NASDAQ: TSLA) CEO Elon Musk thinks so. What remains unclear is the scope of the competitor landscape and what Tesla will have to accomplish to solidify its stake in the emerging electric car market in order to become a viable long-term investment.

Tesla Motors is proving to be a technologically disruptive presence in the transport industry. The company ranked 1st in Deloitte’s 2012 Technology Fast 500 Ranking, a measurement on percentage of revenue growth over 5 years. In this case, Tesla witnessed growth of 270,000%. 

Like many start-ups however, Tesla Motors has suffered its fair share of drawbacks as it strives to bring its next-gen electric vehicles to market. Issues have included two safety recalls for its Roadster model in May of 2009 and October of 2010 as well as a number of lawsuits involving founder disputes and charges of slander and breach of contract. Despite these road bumps, Tesla has recovered in the last few years. For Q1 2013, a gross margin of 17% was reported and, as Elon Musk wrote, “Tesla reached profitability in the first quarter of 2013 for the first time in our 10-year history.”

The business expects its gross margin to soar to 25% for Q2 while acknowledging that it will no longer be able to rely on zero-emission vehicle credits income as the price declines and credits will only apply to 1/6 of worldwide deliveries.

The competitor landscape

With Tesla finally having some positive news to share with investors, the rest of the industry is beginning to take notice.

In particular, Tesla caught the attention of General Motors (NYSE: GM) who has put together a team to investigate the threat Tesla poses, with General Motors vice chairman Steve Girsky stating, “History is littered with big companies that ignored innovation that was coming their way because you didn’t know where you could be disrupted.” This is a positive indicator for Tesla given competitors are now admitting to taking Tesla seriously.

The ailing automotive giant is attempting to ensure it remains profitable, reporting a 0.02% increase in global market share to 11.4% for Q1, 2013, despite earnings before interest and taxes, or EBIT, $400 million less than the same time last year, signaling an overall decline in the market. This decline is driven by consumers who are demanding smaller, efficient vehicles in light of rising oil prices. We will probably see General Motors adapt to these demands in the longer term, providing significant competition for Tesla. At present, Tesla is in an excellent position to obtain a significant share of this emerging market.

Meanwhile, another competitor, Audi, (NASDAQOTH: AUDVF) has designed an electric car of their own: the R8 e-tron. Audi, however, has decided R8 e-tron electric car model will not be for commercial sale and only 10 will be made for ‘research purposes’. Each R8 e-tron will cost $1.3 million to make and were slated to sell commercially for $150,000. The reason for this decision was the slow pace in battery technology.

Historically, however, Audi has been known for its ability to innovate. Examples include the aluminium space frame design in the original Audi R8 as well as  Audi's four-wheel-drive Quattro technology. With this in mind, Audi's unexpected withdrawal from the electric car market is probably temporary. Furthermore, it is likely Audi's next electric car offering will be a next-gen sports car with an expensive price tag while Tesla attempts to bring affordable electric cars to the masses

So while Tesla has the advantage at present, competitors will begin to close the gap as market demands shift. Tesla must be swift to capitalize on its position as it does not have the financial backing of giants like General Motors. Musk has proven he can transform a landscape before, with Paypal largely changing the way money is handled online. It is reasonable to deduce he may be able to repeat this success in the automotive industry, relying on innovation and disruptive technologies – the hallmarks of technological entrepreneurs – to make Tesla a stand out success.

Trump card?

The most interesting turn of events for Tesla Motors is its own announcement of the release of details for the Hyperloop transport system on July 12, 2013. The Hyperloop system works by reducing friction and propelling transport capsules in a near vacuum environment. The system’s claim to fame is two pronged: It will allow passengers to travel from San Fransisco to Los Angeles in 30 minutes.
The estimated cost ($6 billion) is roughly 1/10th of the cost of proposed plans for new rail networks such as California High Speed Rail network, estimated to cost $65.4 billion according to the CHRSA.

My Foolish line

If such a system can be developed by Tesla Motors alongside its burgeoning fuel efficient car line, Tesla will have the ability to revolutionize transport. Innovations like these will be required to make Tesla Motors the next household name. 

Dan Sayers has no position in any stocks mentioned. The Motley Fool recommends General Motors and Tesla Motors . The Motley Fool owns shares of 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!

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