A Closer Look at This Innovative Company's Business
Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every company in the world has its strengths and weaknesses. That isn't the question. The question is, "Which one is greater?" Tesla Motors (NASDAQ: TSLA) has generated a lot of excitement among its customers and among investors, too. Year-to-date, its stock is up about 215%, why wouldn't investors be excited? Let's dig a little bit deeper and find out if it's really worth buying at this point.
It's electric. It's not a hybrid like Toyota (NYSE: TM) has produced, and that fact alone should generate a lot of interest from potential buyers. Toyota only sold 2,353 Toyota Prius' in Q1 -- not even half the amount of vehicles Tesla sold. Because Tesla's vehicles are fully electric, fuel filters, gas stations, smog checks, oil changes, spark plugs, and timing belts all become a thing of the past.
Gas mileage? What's that?
Besides being fully electric, never needing to replace/maintain any of the issues listed above, and experiencing phenomenal sales last quarter, Tesla is working to make its vehicles cheaper. Elon Musk's three step process should ensure long-term profitability. In short, these three steps are: 1) Sell expensive, luxury cars, knowing not many will sell. 2) Sell cheaper luxury cars knowing that more people will buy them. 3) Sell affordable cars that virtually everyone can afford, and sell a lot of them.
Tesla is currently at the beginning of stage two, which means its cheap vehicles are yet to come. This could pose some serious competition for other automobile manufacturers, but it is certainly a strength of Tesla's.
Unfortunately for Tesla, its biggest weakness has little to do with it as a company. That in and of itself is a weakness. However, if you read the reviews of current Tesla owners, the one thing that always sticks out is the battery life. Congratulations, Toyota, you win in this category. This is something the Toyota Prius hasn't had to overcome much of up to this point.
It has to be frustrating to only be able to drive just over 200 miles (at highway speeds). However, Tesla might have more control over this than one might think. If it can continue to grow and sell thousands of vehicles, someone, somewhere, will provide a solution to their problem. That's how the free market society works. Someone will develop long-lasting batteries that Tesla can use, and make a lot of money off of it.
Even if technology doesn't create a quick fix for battery life, the price should drop dramatically. In fact, a McKinsey analysis showed that lithium-ion batteries could fall by as much as 66% by 2020. While it is not expected for batteries to advance as quickly as smartphones or computers, small changes can make a huge difference. The ability to develop cheaper batteries may be the biggest factor in how popular electric vehicles become.
Right now, not everyone can afford one of its state of the art vehicles. Let's face it, not everyone will pay $60,000-$90,000 for a car. Yes, it will save money over the long run, but a lot of people simply don't have the money. Again, it will be rolling out cheaper models as time goes on, and I believe this will one day be a strength of Tesla.
Growth. I could go on and on about the opportunities that Tesla presents, but in short, it continues to have tremendous growth opportunities. The more vehicles it sells, the more people will be informed, and the more people will likely buy its vehicles.
The company holds a competitive advantage over the rest of the industry. It has a jump start over other companies because it has been producing fully electric vehicles for some time now. I view Tesla as a pioneer in an uncharted land. It seems that years of growth are ahead and its momentum is just starting. It hopes to open its first store in China by the end of 2013, which would open the company up to the world's largest auto market.
With its Model X, Tesla plans to blend the best of an SUV with the benefits of a minivan, and build it into an electric car. Tesla promises the Model X to have a lower center of gravity than any other SUV and still have "nimble reflexes at every turn," even with up to seven passengers. It will have new features, such as "falcon wings" as seen below.
You can be certain of one thing -- companies like Toyota will do everything they can to catch up to Tesla. There is always the threat of copy-cats, but that is true of any company. At this point, its a matter of when and how it will happen. Toyota is seemingly the closest competitor with its hybrid versions, but Elon Musk is bound and determined to change the way we view vehicles. I don't think Musk would be scared of a little competition.
It is far easier for companies to imitate what has already been done, and improve upon it. It is not as easy to create an entirely new concept, design, or idea. It is yet to be seen how Toyota, Nissan, Ford, or GM will do this, but if Tesla continues to grow at its current rate, it would be silly for these companies not to follow suit and charge less for it.
The bottom line
Tesla is in a tricky position. It has so much potential to do very well, but it is bound by technological restrictions that it can't control. Tesla will likely be able to control their success, but right now, they are dependent on others to fix their weaknesses. Regardless, I expect jaw dropping growth out of this company for years to come. I believe the weaknesses will take care of them-self if Tesla can continue its fury of growth.
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Tyler Wofford has no position in any stocks mentioned. The Motley Fool recommends 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!