Tesla Motors the Prodigy Child

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

Tesla (NASDAQ: TSLA) is the prodigy child of the automotive industry.  It has developed and distributed electric cars with artisan quality and efficiency, while still being considered a baby compared to other companies in the automotive industry (fun fact: since GM (NYSE: GM) declared bankruptcy and went public again in 2010, Tesla is actually the second oldest US automaker listed on the NYSE after Ford).  Tesla has a visionary leader with a disruptive technology.  The future looks bright as it is teaming up to build a charging station infrastructure, leasing out its electric drive train technology to major car manufacturers, and looks fairly attractive on a valuation basis.

Teaming up on infrastructure

Elon Musk has a doubled down on the alternative vehicle powertrain. He sits on the board of SolarCity (NASDAQ: SCTY) as well as Tesla Motors. These two companies have banded together in a plan to roll out a national recharging station system, connecting the West coast to the East coast in two years, and further expansions after that  (see the map below). Elon is using this network to fix the problem of which comes first: the recharging infrastructure, or the demand for electric cars. As the network of super charging stations is rolled out by Tesla and other electric utilities, they will increase demand for electric vehicles.  This demand will come from would-be customers that worry about becoming stranded without an extension cord and outlet. The term used to describe this worry has been dubbed “range anxiety.” 


<img src="/media/images/user_16122/tesla-superchager-within-2-years_large.jpg" />

Range anxiety is being addressed in different ways by different companies.  Tesla is maximizing their range by increasing the size of the battery packs, and putting up “super charging” stations that can recharge a car's range to 50% capacity in 30 minutes. GM’s Chevy Volt platform and the Toyota Prius, on the other hand, have taken a more hybrid approach by having an onboard gasoline engine that extends the range of the vehicle when the battery becomes too low to provide locomotion.  GM’s strategy tries to tie the efficiencies of an electric motor with the established fossil fuel distribution infrastructure. Both strategies are focused on the end goal of making it easier for consumers to adopt this new efficient automotive technology.

Leasing their technology

Tesla currently leases its power train technology to Toyota (NYSE: TM) (among other auto manufacturers) for their hybrid version of the Rav4 SUV. This is where a big opportunity for another line of revenue for Tesla lies.  As the premier all-electric vehicle producer in the US, the automotive industry majors are in constant competition with each other to create the best and most up to date vehicles possible.  When it comes to new technology, the automakers can either devote billions of dollars in research or license out the established technology from firms like Tesla.

One of the biggest challenges to Tesla's vehicles is other auto-manufacturers coming up with vehicles that get impressive gas mileage at a low cost, like the wildly popular Toyota Prius.  In 2011 the Prius sold over 450,000 units, while Tesla is looking for a year end goal of 20,000. Instead of running from the competition, Tesla sees opportunity in Toyota's sales, as Toyota has become a customer for Tesla's superior drivetrain technology.

Valuation the cold hard facts

Tesla’s track record isn’t a bed of roses--it has been running into production problems with its battery supplier, and is still losing money on an annual basis.  In 2011 Tesla lost $2.53 per share, up from a $-12.46 loss in 2008.  Tesla continues to invest millions in R&D in search for a long term payoff--$204 million as of their 3Q filing.  When comparing Tesla to its competitors, Tesla only sells a fraction of the cars that the other US majors sell.  This puts pressure on Tesla as other companies like GM can use other profitable divisions to prop up their new ventures into electric vehicles. Tesla is on track to achieving its goal of producing 20,000 cars per year with a weekly production rate of 400 cars. Tesla has a lot of room to grow here, as its main constraint is currently in its battery pack suppliers.

As the market for all electric vehicles grows from its .3 percent market share into a main stream technology, Tesla will be the purest play in this industry.  This past December Tesla declared its first positive cash flow month via a Tweet from CEO Elon Musk himself.  Now we can’t take that as an official SEC filing, but it is certainly a step in the right direction.

Another interesting fact about Tesla is that it currently has 36.9% of its outstanding shares sold short, among the highest on the NASDAQ. That means that one in three shares is borrowed against and any sort of rally could lead to a huge short squeeze.  A short squeeze is when short sellers are forced to buy shares they borrowed to close out their positions. There is no guarantee that Tesla’s stock will go up, but if it does, it will create a short squeeze of major proportions.

Foolish Bottom Line

Tesla is a dual play on the electric car technology shift.  It licenses out its technology, as well as operates as an auto manufacturer. Traditional hybrids like the Prius or Volt are vehicles that compromise performance for practicality, whereas Tesla’s are electrified luxury performance vehicles. Electric motors are 90% efficient in converting power in into locomotion, whereas the most efficient internal combustion engines are closing in on 35% efficiency. Tesla’s bet on efficiency coupled with luxury could pay off big once the momentum behind electric cars and their efficiency becomes mainstream. As the market for these vehicles expands, we should see Tesla’s stock take off with the potential of rocket fuel being added if there is a short squeeze.  Tesla is putting the pedal to the metal when it comes to the adoption of electric powered cars.

wpatoka 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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