This is a mainly reader-requested follow up to the highly popular previous article, Tesla Motors' Full Analysis, Its Only Mistake, Outlook and Elon Musk. Since then, Tesla Motors (TSLA) had many important strategic announcements including one that fixed its "first mistake," completed a very successful secondary offering and "squeezed out" most of its shorts. Tesla also went from people on the street asking "What's Tesla again, an electricity unit or something?" to "Hey, I saw something about those Tesla cars on the news the other day."
Following the first article, there were an overwhelming number of mainly positive responses and questions from potential and current investors, along with several investment firms. Even Tesla CEO Elon Musk confirmed to me on Twitter "Good piece, it rightly identified Tesla's mistake (along with other articles)", one day later announcing "Time to up the ante (and fix some mistakes), Tesla announcement tomorrow" followed with the conference call where Tesla impressively improved its financing program and website display.
There was also some really interesting advice from billionaire hedge fund manager David Einhorn. He said "It doesn't make sense to "blindly follow" me or anyone else into a stock. Do your own work." The first sentence of my article was "We live in a world where many people (or as I call them sheeple) blindly follow 'smart' people" followed by references to David Einhorn and Bill Ackman's wrong short and long bets on Chipotle (CMG) and J.C. Penney (JCP), respectively.
Call these coincidences or not, I'm just glad as an investor that Tesla fixed its only mistake, so I checked one more risk off my list. Regarding Einhorn, I don't really care about what he says, I added more Chipotle to my portfolio after he shorted it and his sheeple followed, giving me a nice second entry point.
As expected, there have been hundreds of investment articles written since Tesla's famous surge began. A few have been superb, some have been decent, but unfortunately most are just useless, misleading pieces written by what I call "bandwagon analysts." These wagoners think they can have a quick look at any company's financials, charts, read some recent news and churn out a solid investment thesis. The funny, well, sad part of this is that most of these wagoners don't have any personal positions, so only the sheeple following them end up losing or missing out on money.
Also, when they fail, these analysts will very articulately blame it on everything but themselves; macroeconomic conditions, Fed Policy (although it hasn't changed in years, poor Bernanke), exuberant / cult-like following of the stock, unpredictable short squeezes (as if short interest numbers haven't been publicly announced all along), government subsidies (as if those haven't been in place for years and for many other companies) and the list goes on and on but never comes to saying "I apologize for my false investment advice in my previous article". Don't be one of these sheeple. Filter all the information you get carefully, do your own homework or at least ask someone you trust to do it and always make the final decision yourself.
Now, let's begin analyzing all shorts' and skeptics' theories and weighing true risks and upside potentials Tesla is still facing to reevaluate it as a long-term investment as of July 2nd. I did my best to rank these in order of sequential effects and importance. Also, I switched my pricing model from conservative to realistic, now that the majority of the announcements and the short squeeze are over.
(Feel free to ask me any questions as it would take pages to explain here all the formulas I built and factors I took into account but please don't ask me why I'm using P/E ratios higher than Ford (F), General Motors (GM), etc., 1. It's not a valid comparison (refer to 1st article for full explanation) 2. The market doesn't value growth stocks like risk managers… Facebook (FB) P/E ~ 2200, LinkedIn (LNKD) P/E ~600, Amazon (AMZN) P/E ∞…)
1. True EV Technology & Its Main Advantages: Fuel & Maintenance Savings
All along, this has been the fundamental reason why shorts and skeptics have been wrong about Tesla and still are today. They just don't get it. They still think of electric cars as liberal toys that are a pain in the neck to charge, cause "range anxiety" and will never sell more than a couple thousand units. This was partially correct until Tesla showed what a true EV can be since all the major automakers built ones that looked and performed like golf carts, mainly for compliance reasons rather than true passion for superior electrical motor. Electric is only one of the technologies auto giants have been acting like they've been working on. You name it - hydrogen cars from major manufacturers like BMW to biodiesel, flex-fuel, natural gas cars from others and the list goes on.
Electricity does stand out with the advantage of being available everywhere compared to all fuel sources, including gas. You can charge an EV anywhere you have power, from your home garage to a cabin in the woods.
While decades of this planned act created a giant misconception about EVs, many engineers knew this wasn't true. Electrical motors are indeed superior to internal combustion engines in many aspects, including on-board efficiency (to move the car and power accessories) of 80+% vs internal combustion engines' efficiency of 15-20%, maintenance benefits (significantly fewer number of moving parts), consumer savings (gas price vs electricity price), keeping air quality clean in populated areas, positive environmental impact in the long term, etc.
Just think about what would have happened if GM hadn't killed EV1 and all the car companies had kept working on EV technology since 1999? The original EV1, GEN I in 1996, had a range of 60 miles. GEN II had a 100-mile range in 1998 and 160 miles by 1999. Yep, double the range of a 2013 Nissan Leaf. That's a 166% improvement in range in less than 4 years. A minimum ~27% annual improvement rate would equal to 2235% improvement in 13 years, thus a range of well over 3000 miles. Sounds crazy? I'm sure your kids' cell phones having more processing power than the computers that landed Apollo 11 on the moon would have sounded pretty crazy too.
Again, even if the annual rate slowed down significantly, we would have been well over the 1000 mile range by now. Plus, 27% was the improvement rate achieved by only GM's tiny EV1 department; imagine if all manufacturers' main R&D departments were competing for it. During GM bankruptcy hearings in 2008, former GM CEO Rick Wagoner stated his worst decision during his tenure was "axing the EV1 electric-car program." GM ex-R&D chief Larry Burns stated he wished "GM hadn't killed EV1, they could have had Chevy Volt on the roads a decade ago." And for all those claiming EV1 was killed because it wasn't profitable, skeptics said the same thing about Prius in the early 2000s. Now it's one of the best-selling and most profitable cars in the world.
So why haven't electrical motor prevailed if they are so superior? Why did GM kill a product that was constrained by production, not demand? Two words: fuel and maintenance. Going back to electronic devices, none of them had the world's largest corporations lobbying against them. Throughout recent history and still today, 7 of the world's 10 largest companies by revenue, private and public, are in the Oil and Gas business. How do you think they'd fare if there were 500+ mile ranged, compelling EVs rolling around the world?
For comparison's sake, what companies did Motorola (MSI), Nokia (NOK), Apple (AAPL), etc. have intelligently filibustering them? Land line providers Verizon (VZ), AT&T (T), etc.? Those companies grew exponentially larger by providing cell phone service. How about PCs, TVs and other electronic devices? Which one had the world's most powerful companies lobbying against them? None. They only had inter-industry competition, which is the best kind.
Aside from EVs' obvious fuel savings, there's also the highly underestimated maintenance savings in the long term due to having far fewer moving parts than ICEVs. Going back to the curious case of the EV1 cancellation, there were many claims that GM feared the emergence of electrical vehicle technology because the cars might cut into their profitable spare parts market. The global automotive repair and maintenance services industry is expected to be worth almost $306 billion by 2015, according to Global Industry Analysts.
The US is the world leader in this market segment, with an estimated market value of over $41 billion in 2012. Here's a great Forbes article on this subject and links to 2012 10-K forms of AutoNation (AN), Penske (PAG) and Sonic Automotive (SAH).
Again, how do you think these guys would fare if EVs became mainstream?
(In the case of Tesla, cars are repaired at service centers that are separate from the stores and they will never make any profit. Elon Musk confirmed "I've told the Tesla Service Division that their job is never to make a profit since this creates a conflict of interest when it comes to product quality. I hate the idea of making money because our product broke, that's just wrong.")
Ultimately, for EVs to succeed, there was a serious need for an independent, engineering-influenced company rather than a traditional auto manufacturer working hand-in-hand with oil, auto parts, mechanical service companies and other interest groups. Just think about the overhaul these companies will have to go through once the EV tipping point is past.
"How is it possible for a tiny startup to build the "best car ever" in the 100+ years old auto industry?"
It took Tesla Motors, a tiny San Francisco startup, less than $105 million in funding and 5 years to produce the 244 mile range Roadster, with only private funding, no government assistance and well before it went public. Elon Musk was one of the first engineers with the courage and business knowledge to invest in EVs and he has progressed incredibly. Anybody that has driven the Model S knows it's superior to any car you've driven. Motor Trend and Consumer Reports both confirmed it's the best car (not just best EV) they have ever tested. Regarding charging and maintenance, Tesla drivers already know how convenient it is to charge overnight at the comfort of their home and have a ~250 mile car ready every morning, never have to go to gas stations, deal with oil change or other ICE parts' periodic maintenance.
Most people in the developed world have cars but don't drive more than 25 miles a day and fly or use other types of transportation for vacation, business traveling, etc. Heck, I didn't have any money after college and I still flew instead of driving. That $150 round trip Southwest Airlines ticket costs about the same as gas, lunch and the labor of driving for 5+ hours. Besides, the forever-free Tesla Supercharger Network will cover North America, EU and other areas of the world well before the mainstream customers will be able to buy Tesla's GEN III in 2017.
It's also mind-blowing how so many analysts, including auto industry ones, aren't emphasizing how unprecedented Tesla's achievements are. If an EV startup said they would produce a car from scratch that would be "the best car ever" a couple of years ago, nobody would have even given them a 1% chance. Tesla Model S was the "first unanimously selected" Motor Trend Car of the Year since the award originated in 1949. It was also the "best car tested" by Consumer Reports, established in 1936, along with numerous other publishers highly praising the car. So why are naysayers' reasonings so clouded? Is it not being able to see beyond the auto manufacturers' decades of mistakes? Is it the stubborn politicians in them? Or is it just how most people are in today's finance; arrogant, impatient and short-sighted?
There are no realistic reasons why compelling EVs won't succeed. In today's highly connected world, people will gradually witness friends, neighbors or drivers around the globe, realizing plugging in your car overnight and having 200+ miles every morning is extremely convenient and economical. Supercharging Networks will also address the rare need for long distance driving done by less than 10% of the world population. Even if a small portion of people who already own luxury vehicles from Audi, BMW, Mercedes, etc. in major markets like Europe, China, Japan, Brazil and the rest of the world purchases a Model S or Model X, Tesla will be a highly profitable company without any form of subsidy. This will be followed by mass production of Gen III which will eventually turn Tesla Motors into a major global auto manufacturer.
But unfortunately, many analysts are still trying to project Tesla's future success based only on EV Market's track record, like trying to project the athletic success of a fully grown teenage boy based on his dwarf parents.
2. Shorts: "TESLA Will Never Be Profitable Without Government Subsidies," Comparing Apples to an Orange Seed
Tesla will be profitable excluding ZEV credits and $7,500/car federal credits by Q4 2013. Tesla's current numbers are completely normal for a start-up investing all of its money first to build and now to improve its whole organization for its first true product and future ones. This is somewhat similar, well, in a very small scale, to Amazon investing its billions for building its business for the long term rather than showing profits now for the short-sighted investors. Jeff Bezos is indeed a smart CEO; he hasn't succumbed to the clowns on Wall or Main Street so far.
Some bandwagon analysts now describe Tesla's numbers as "Stellar," "Improved explosively," "Surprisingly good," etc. by performing the traditional year-over-year and quarterly comparisons. How can professional analysts be blind enough to apply the same metrics used for century old companies to a young and lean company with an unprecedented line of products like Tesla? And how can a potential investor be blind enough to follow these analysts and not say "But your analysis is comparing apples to an orange seed!"?
There are of course still many skeptics pointing out facts like Tesla having a slightly negative operating profit, stopping to report the reservation numbers, etc. But again, these are mostly the same people that had said things like "Tesla will never produce a car on its own," "EVs won't sell," "You'll never turn a profit," "Tesla is running out of cash, bankruptcy next quarter" etc. and pointing to the numbers and ratios all along. They will not stop until Tesla reaches the point where it satisfies their beloved numbers and ratios. Unfortunately for them, by the time Tesla reaches their numbers and ratios, all of these analysts and investors will have missed out on the exponential profits early investors already started enjoying.
After all, if you don't have foresight and courage, you will never succeed big in life.
3. Tesla's Ultra Lean Foundation Following Efficiency Optimization Throughout 2013
For me, the best part of the Q1 earnings call was hearing Musk confirming that Tesla's top priority for the entire 2013 will be to optimize all aspects of the company rather than scaling up production. This is the kind of news a smart investor wants to hear as we all know a company operating on a sound and very efficient foundation will be extremely successful and hard to catch by rivals in the long term. This foundation, or the "main blue print," is very important as it will be used for all future models.
Tesla has been aiming to accomplish the majority of the efficiency optimization by Q4 2013; thus, their goal has all along been to reach 25% gross margin by then, excluding ZEV credits. Musk also mentioned "We'll be pushing to test the depth of the demand that's out there during 2014; it's probably quite a bit higher than what we had originally thought."
For its 2013 strategy, Tesla did have to balance between delivering cars to customers who have been waiting very patiently and not delivering a significant amount of cars produced with low margins. Keeping production around 5,000 cars per quarter and working on improving efficiencies is the strategy they picked and I completely agree with it.
Now, what kind of a Tesla investor in their right mind would want to see deliveries of tens of thousands of cars produced inefficiently, with low margins? The kinds who want to see a bunch of "big" numbers on paper since they lack even a tiny bit of vision. Also, I can think of many short-sighted traders (who should not be called investors) wanting to pocket small profits here and there, as they stressfully try to "time the market" for a volatile stock like Tesla, end up missing out on many rallies, re-entering at much higher points.
I think Tesla is an investment that will reward "true longs" much more than "market timers" since its products are unprecedented, technology improvements are unpredictable and for many other unquantifiable reasons such as effects of word of mouth marketing.
4. Tesla's Solid Cash Balance and Underestimated Mega-Factory
These two factors are also highly underestimated by most analysts. The current Tesla plant (originally the Fremont Assembly, secondly NUMMI) was built in 1962 and refurbished in 1984, as large as 88 football fields and was able to produce up to 400,000 units a year. This annual production number can end up becoming significantly higher due to technology and efficiency improvements over decades allowing Tesla to utilize it much better; thus, Tesla will more than likely not have to purchase a second factory until 600,000-700,000 units/year production levels.
The second factor is the ~$800 million cash Tesla currently has being more than double the cost of remainder of Model X program (around $200 million), supercharger network expansion in US, Canada and EU (around $100 million), adding swapping stations based on customer demand ($50-100 million). This $400+ million cushion and revenue stream from Model S and X deliveries easily allow GEN III program continuation and essentially makes Tesla a very safe investment even if a force majeure event occurs.
5. Shorts: "Major Manufacturers Will Produce Better Products and Squash Tiny Tesla"
As of today, there isn't a single EV or even a prototype that can come close to competing with any Model S versions. Below are the cars many analysts have been using in various comparisons but none of these comparisons make any sense since no person in their right mind would compare a $72,795 Audi S6, a luxury, sports sedan to a $23,000 Toyota Camry either. No comparison in range, performance, features or any other aspect between Model S and other EVs make sense.
Also, GM informed the public last March that they've been working on a "200 mile range electric vehicle." Considering the auto industry's prototype to production lead time of average 2.5 years, we can safely say the Model S and Model X will not have a direct competing product until 2016. For instance, the Chevy Volt prototype was unveiled in January 2007 and production began in December 2010, that's 3 years and 11 months. By the time real competing products hit the market, earliest in 2016, over a hundred thousand Model S and X will be rolling around the world. And since these two models share 60% production content, Tesla will be a very high profit margin manufacturer and thus see a rapid rise of its stock price. I should also note that the Chevy Volt is still losing money, estimated to be around $40,000/unit although it's eligible for the same federal credit and started production 1.5 years before Model S.
For long term though, I do believe other manufacturers' EV success will help Tesla as more compelling EVs on the road will help convert more ICE vehicle drivers rather than Tesla doing it slowly by being the sole successful EV manufacturer. Elon Musk, of course, knew this all along. But again, as of today, Tesla has a giant lead over others and won't have a true EV competitor for many years to come.
Here's a more accurate comparison of Model S 85Kwh Performance and its competitors. For any driver that's in the market for a luxury sports sedan, doesn't drive more than ~250 miles a day and doesn't take monthly road trips, Tesla is clearly the best option with its highest Consumer Reports rating, advanced technology, long-term savings, less maintenance, etc.
6. Europe, Europe, Europe! => Asia => World
What happens when you start selling a 400 kilometer range EV in a continent where all driving distances are significantly shorter than the US, average gas prices are more than double and governments and people are proactively more eco-conscious?
Tesla European stores and service stations are already each up to 13 locations and growing, production is in progress and deliveries are scheduled to begin in July. Musk also has an announcement coming up for the European Supercharging Network expansion. I expect Model S EU quarterly sales to surpass the US by 2015. Even if this theory falls short by a third, it will once again prove wrong the "Model S demand is plateauing" claims, not realizing the majority of luxury sedan purchasers in the US and the world haven't even physically seen a Model S.
China, the world's largest car market, had seen its luxury vehicle sales grow by 20% from 2011 to 2012. Chinese cities also have the worst air quality in the world due to heavy use of coal. The government didn't take any necessary steps for decades although many scientists and citizens called for action repeatedly. Sound familiar?
Record-breaking air pollution levels were linked to 1.2 million deaths in 2010 and finally forced the nation's government to impose tougher fuel economy standards on the auto industry. The most recent measure requires average fuel consumption for automakers to 35 MPG by 2015 and 47 MPG by 2020. This will also affect foreign car makers, as they will be forced to adjust to the new regulations if they plan to launch models in the world's largest car market. Tesla doesn't have any problems in this area as it has zero tailpipe emissions and 90+ MPG equivalent on all current and future models.
I should also note that one of the best factors about Tesla's sales outside of the US is not having auto dealers fighting against it in hundreds of regions.
7. Free Supercharger Network Is the Key, Battery Swapping Will Disappear
Here are a couple of facts about superchargers since many analysts still make false comments:
- 200 miles in 30 minutes @120Kwh, ~16 times faster than public charging.
- Free Forever for Tesla customers, the majority of locations will be solar powered, courtesy of SCTY, chairmaned by none other than Elon Musk.
- Tesla supercharging technology and number of ports are improved by addition not replacement thus lower expenses in long term. (It already improved from 90Kwh to 120Kwh since its introduction in September 2012)
- Each supercharger station costs $300K including solar roofs and has NO or LITTLE rent due to Tesla clientele traffic increasing property value.
- Regarding current partners Daimler and Toyota or other manufacturers paying to use the network in the future, Musk said he prefers it being free for non-Tesla customers, also meaning that companies will need to help build and pay an annual fee.
I also think companies, residential communities, commercial real estate developers, government entities, etc. will partner with Tesla to have superchargers built on or near their properties for increasing demand from their customers, employees, etc.
Update: On June 24, 2013, CBL & Associates Properties Inc. partnered with Tesla to build 5 superchargers in its malls across the country.
Battery swapping takes about 90 seconds, half the time to fill up a tank of gas. Tesla will first test the swap program in high-traffic corridors between Los Angeles and San Francisco as well in the Washington-New York-Boston region and expand based on customer demand. Musk said $50-100 million would be enough to cover the US since all swap stations will be added to supercharger stations.
I don't see battery swapping as necessary in the long term. Many people would be content with getting a free, full charge (~250 miles) during a 45 minute break where they can get food, go to the bathroom, etc. when/if they take a road trip. Plus, the technology already improved and will keep improving so by the time the US is covered, free supercharging will more than likely be under 30 minutes for a full charge.
From an investment point, I don't think battery swapping will have any significant effects on Tesla's bottom line or cash balance in the short or long term. The battery swapping idea will silently disappear as mainstream people realize the convenience of charging at home, battery technology improves to ranges over 350 miles (that's equal to an ICEV range and 5 hours of driving at 70 miles/hour, you have to take a break at some point), free supercharging technology improves to under 20 minutes.
8. Tesla's Extremely Low Marketing Costs and No Revenue Loss to Car Dealers
We all know word of mouth is the best advertising. According to global research firm Nielsen, 92% of people trust recommendations from friends and family above all other forms of advertising when making a purchase decision.
As Musk mentioned repeatedly, Tesla's best salespeople are its customers. No car company or any company in general has customers converting family, friends and people online to its product like Tesla. There are thousands of blogs, "commercials", documentaries, etc. made by current and "wanna be" customers about Tesla, passionately spreading the word, free of charge. I should also note that auto giants GM and Ford spent over $5 billion in advertising dollars in 2011 alone, with most expecting that number to rise by the end of this year.
Another amazing free advertising for Tesla is the incredible number of celebrities showing up all over the media with their Teslas, from Metallica singer James Hetfield being interviewed about his Model S to Morgan Freeman, Ben Affleck, Cameron Diaz, Pharrell Williams, etc.
All of this free advertising isn't just "bunch of crazy liberals spreading their green agenda." The product is simply superior to all luxury sports sedans people have driven. Consider this, 25% of Model S test-drivers made a purchase. I wouldn't have believed this crazy number if it wasn't for witnessing two people putting deposits down for 85Kwh performance models during my test drives. (I test drove multiple times for analysis and pleasure reasons) Now all Tesla needs to do is spread its stores and service stations globally so more people can be aware and test drive its cars.
For those unaware, I should also mention the incredible, growing number of Roadster and Model S drivers who end up becoming Tesla investors, simply amazing.
As we also know, the National Automobile Dealers Association (NADA) and its friends in federal and state governments have been fighting Tesla. They try to prevent Tesla from opening stores and/or selling cars online directly to customers in mostly red states. This will definitely cause problems in the short term, but I'm not concerned for the long term for three reasons. Almost all car purchasers search for and compare cars online and already make their purchase decision. Once decided, I doubt people will change their minds because they have to drive 3-4 hours out of their state to make the $63,000+ purchase for a car they'll be driving for many years.
Unfortunately, another example of broken legislative process in the US is the recent public surveys showing 90+% support for Tesla selling directly to customers in North Carolina and Texas but state governments banning it from doing so. On a positive note, criticism for NADA has been growing even from conservative media that has been bashing Tesla constantly. After all, conservative Republicans are the biggest fans of a free market, right? This growing support from both sides of the political aisles and media should help Tesla progress. Tesla is also deploying local lawyers to fight to prepare for a "multi-front war" against local laws.
Worst case scenario, Musk said he'll take the fight to the federal level if it starts affecting sales significantly. I think Tesla has a good chance of winning here after becoming the first American car maker to completely pay off its loan to the government. (Yep, Chrysler has been Italian owned since 2009, GM is still partially government owned since its bankruptcy in 2009 and Ford still has more than $4 billion to pay back) Also, the US Government has set goals for all manufacturers to have Corporate Average Fuel Economy of 35.5 mpg in 2016 and 54.5 mpg by 2025. Who do you think the US Government would support? There is already a White House Petition to allow Tesla to sell directly in all 50 states, started by a Tesla fan named "Ken" (Great job!) with over 73,000 signatures as of June 30th with 27,000 more needed before July 5th. Need I say you should sign this petition if you're long Tesla?
I think the auto dealership model in the US is outdated and these companies will eventually share the same fate as CircuitCity, Borders, etc. if they don't reinvent their business models.
9. Shorts: "EVs Aren't As Green As They Are Marketed"
First of all, I should note that this argument would only partly affect Tesla's future success since people purchasing Tesla cars strictly on "green intentions" are only one part of the customers. Those of you who have driven the Model S know exactly what I'm talking about; it's a Car 2.0 from all aspects. Tesla's goal has always been to make the best car in its segment, not just the best electric car, so expect the Model X, Gen III and even the Tesla Truck to be a top contender or winner for all the major auto awards and highest scores like their older brother Model S.
Also, this green argument is an area where nobody is completely right since it's impossible to calculate the carbon footprint of an internal combustion engine vs an electric vehicle. Nobody can accurately take all the factors contributing to the carbon footprint of an ICE vehicle starting with how oil is researched, drilled, refined, transported globally, how much of a carbon footprint each part of an ICE car has and a hundred other factors vs the similar hundreds of factors for EVs such as the resources used for electricity production, production of all parts, etc. (although EVs have way less parts then their ICE counterparts)
There are many articles written from both sides on this subject including a famous study by the Norwegian University of Science and Technology that was used repeatedly for conservative propaganda around the world. It should have been fair to disclose on their side that this university is funded generously by StatOil (STO), the largest oil producer in the Nordic Region, the 13th in the world. Norwegian University of Science and Technology even hosted "Statoil Day" to celebrate the 40th anniversary of the company in 2012. There are tens of other connections including the professors who authored the research having second jobs in the oil industry, etc. but I will not get much into it since it's a never-ending debate that will not affect Tesla's success. For those who'd like to read more about it, here is a great, factual counter article.
Here is a major fact that nobody can reject though. Electric vehicles will help us transition to alternative energies and this definitely reduces global CO2 emissions since,
- Coal and oil sourced power plants are being replaced by more efficient hydrogen and sustainable energy powered plants, helping decrease the carbon footprint of EVs every day.
- Tesla's Supercharger Network will be 100% sustainable energy powered, mostly solar followed by geo-thermal in Northern European locations.
- Air quality, especially in urban areas, will be significantly better due to no tailpipe emissions being breathed in directly by people.
- Many Tesla and other EV owners already have, or are purchasing, solar panels for their homes which also helps EVs in this argument.
Again, for Tesla's future success and from an investment point, the "EVs aren't that green" claim only affects potential customers whose priority is strictly to reduce their carbon footprints. I believe demand for Tesla cars, whether it be the luxurious Model S and X or the ~$30K GEN III, will exponentially grow as more drivers realize how compelling the products are, gas vs. electricity savings, less maintenance costs, better customer service, warranties, etc.
10. Model X and S Share 60% Production Content, Profit Margins Will Widen Significantly
11. GEN III at $32,500 Is A Better Value Than The Camry (in the US or EU)
GEN III has been repeatedly confirmed by Musk as being "Currently in design phase, looks similar to Model S, about 80% its size, will have at least 200 mile range and some cool technology we can't talk about yet. Its performance and features are comparable to Audi A4 and BMW 3 Series rather than Nissan Leaf."
Again, the green car poster child Prius ($26,500 MSRP in the US) was one of the best selling cars in the world in 2012, trailing the Ford Focus and Toyota Corolla. With almost one million global sales, famously eco-conscious Prius customers alone can provide plenty of initial demand for GEN III.
But let's look at the complete picture, how GEN III will fare against comparable cars. If GEN III is executed as successfully as Model S, its features and performance will make it a more attractive car than its ICE peers already. Also, at the mid-size premium sedan price level, electricity vs. gas, less maintenance, free long distance travel by superchargers and other EV savings will be much more significant; thus, consumers will be more inclined to purchase the GEN III over its ICE peers.
Now let's look at the Gen III vs. the best-selling "regular" mid-size sedans.
Think about a family making a purchase decision between "regular" sedans and GEN III. Since monthly savings from driving on electricity vs. gas is a direct deduction from the car payment and GEN III will be a better performing, more advanced car than its rivals, even people in the market for a ~20K compact sedan will begin opting for a Tesla. Think of Gen III as the first gen iPhone for $200 vs. the cheaper BlackBerry, Nokia, Motorola phones back in 2008. It's not only the better performing, better looking, more advanced product but also the eco-friendly, cool product to have.
Now I want you to think about a European family making the same purchase decision looking at the $193 / €146 monthly / ~$27,000 10-year savings.
There are even more positive factors to consider:
- The average U.S. family spent nearly $3,000 on gas in 2012 which approximates to about double the figures above, explained mainly by spouses commuting separately. So you can switch both your ICE cars with two EVs over time and save double the amount for your family.
- Off-peak hour charging rates provided by utility companies are as low as $0.05 in some states, so depending on where you live, you can spend half the electricity costs shown above.
- Did I mention Tesla Superchargers are free forever which pulls Tesla costs even lower?
- I kept GEN III's mpg same as Model S 60Kwh, but we all know its mpg will be better smaller size/lighter weight, not as performance based, etc.
12. Tesla Battery Technology Upgrade In Line With GEN III Production and $7,500 Federal Tax Credit Phase Out
When asked about future battery improvements during the service program conference call on April 26th, Musk suggested a ~500-mile battery is already in the research phase and could be available to new and existing customers at about the 4-5 year mark in the life of Model S. This points to the timeframe of summer 2016 to 2017 which is in line with GEN III production. So around the time GEN III is mass produced globally, existing and potential Model S and X drivers will be able to purchase ~500 mile Model S and X or upgrade their existing car with a substantial discount Musk mentioned.
Panasonic (PCRFY.OB), Tesla's current battery provider and shareholder, announced on June 12th that shipments of NCR18650 units to Tesla will surpass 100 million by the end of the month which roughly equals to about 14,640 Model S battery packs considering each one contains 6831 of them. Tesla already has significant discounts on these batteries and has price breaks scheduled as orders grow.
Regarding the $7,500 Federal Tax Credit phase out, although there is already a proposition to increase the starting point from the 200,000th vehicle sold to the 500,000th, I assumed it will stay unchanged. Tesla should be hitting this milestone around Q1 2016, meaning the phase out will begin around Q3 2016, lowering the credit to 50% and further lowering by Q1 2017 to 25% and finalizing by Q3 2017. Again, this falls perfectly in line with the new battery technology introduction and existing customer upgrade. Thus, they should easily balance out and more than likely in favor of Tesla.
13. Long Term Battery & Drivetrain Performance Risks and Potentials
Durability tests for batteries used in Model S battery packs, Panasonic NCR18650, revealed that even after 2600 cycles, 70% or more capacity remains. 2600 full cycles would equal up to 700,000 miles for the Model S 85Kwh and up to 540,000 miles for 60Kwh. I feel pretty safe claiming battery technology will improve enough for an upgrade before someone drives a Tesla for 300,000 miles.
*** Tesla 85 kWh is covered for 8 years and unlimited miles, 60 kWh battery is covered for 8 years or 125,000 miles, whichever comes first.
Tesla had its first voluntary and partial recall on a backseat latch on June 19th. They handled it in such a superb way that many major publications compared it to Chrysler and other manufacturers' bad recall record and even suggested Tesla's approach should be taught in public relations classes.
Regarding drivetrain, EVs never had a major recall or technology issue. Starting with the 1994 GM EV1 to 2008 Tesla Roadsters that have been driven for over 5 years now, EVs have had very few recalls or vehicle fires when proportionally compared to ICEVs having 16 million recalls and vehicle fires a year in US since 2004.
Having a simpler design and significantly less moving parts, EVs have much less recall risk than ICEVs do. ICEVs have a large engine, transmission, spark plugs, valves, fuel tank, distributor, starter, clutch, exhaust system, catalytic converter and many other parts that EVs don't need.
14. Governments, Rental/Sharing Companies, Commercial Fleets' Bulk Purchases
Once the fuel savings and lower maintenance benefits of EVs are realized widely, corporations, governments, rental/sharing companies, etc. will start switching their fleets to EVs to significantly lower their operating costs in the long term. The majority of fleet cars operate based on shifts which would make EVs the perfect fits, getting charged off-duty. This should pose enormous opportunities for Tesla with the GEN III in standard and the Model S in executive levels. Also, superchargers can be built near offices of these entities to minimize initial concerns and provide additional convenience. After all, 10 purchases of the GEN III or 4 purchases of the Model S equal the cost of a Tesla supercharger build.
Governments around the world: The US Government alone has over 600,000 cars and trucks. Operating and maintaining those vehicles cost taxpayers a whopping ~$4.2 billion a year, according to General Services Administration data. Switching those vehicles to EVs would have tremendous fuel and maintenance savings. And why wouldn't the government bulk purchase compelling EVs when it's been working so hard just to help them progress?
Rental/Sharing Companies: How much would fuel and maintenance savings affect companies whose business models are essentially based on cars? Companies with better fuel mileage fleets will be able to offer lower rates, thus leading the competition.
Corporate Fleets: Corporations around the world also spend substantial money to maintain and fuel their cars, from the compact sedan level to executive levels. They've also been racing to lower their carbon footprint and enhance their "green image." For instance, Wal-Mart (WMT), Google (GOOG) and the US Military are SolarCity's three largest clients. Don't be surprised if you see Tesla superchargers next to their larger offices soon.
15. Skeptics: "GEN III Sedan and GEN III SUV sales will cannibalize Model S and X"
Some analysts including Jim Cramer think even if Tesla is able to produce a ~$30K GEN III and GEN III SUV, these two products will "cannibalize" Model S and X sales. This is like saying the BMW 3.20i currently cannibalizes M5 sales or the Cadillac ELR will cannibalize Chevy Volt sales. No, EVs being a "new" technology doesn't change the fact that wealthier consumers will pay for additional performance, luxury, etc. over mass production versions.
But then Cramer also suggested selling Tesla last July when the stock was at $30. Ouch! That's a 230% profit his buddies missed out on. We won't see how much the GEN III Sedan and SUV will cannibalize the Model S and X until 2017, but I'm betting against Cramer again.
16. Tesla Service Centers Expansion and The Tesla Service "Halo Effect"
I always thought Tesla Service Centers' expansion would be more important than Tesla Stores' expansion since the majority of car purchase decisions are made online but there are many risk averse buyers hesitant to purchase a car if there isn't a service station within a reasonable distance. Musk apparently always had this in mind as well. Tesla is scheduled to double its service center number from ~25 to ~50 by end of 2013, including Middle America, which should give many existing and potential customers peace of mind.
Along with existing Tesla customers being its best salespeople, there will be another unquantifiable but very important factor, Tesla's amazing service and warranty program.
- Fully loaded Model S Performance 85 cars or Tesla Roadsters as service loaners
- Tesla will seamlessly valet the loaner cars to your location
- $600 annual service now optional with no effect on warranty
- Unconditional warranty for Model S battery, even for user error
Again, Musk also guaranteed that Tesla Service Centers will not make a profit, urging them to provide the best and longest lasting service. Having experienced this type of service, customers will surely remain with the Tesla brand for many years.
17. Tesla's Brilliant Product Strategy: Few Products/High Focus with Emphasis On Optionality
These two points are unquantifiable but smart investors know they will contribute significantly to Tesla's future success. For comparison purposes, Apple became one of the most profitable companies in the world by focusing on and perfecting only 4 product lines, the Mac, iPod, iPhone, and iPad.
Notice how the iPhone helps Apple profits skyrocket, later on helped by another high profit margin product, the iPad.
Optionality can be seen in every single aspect of Tesla's products and company strategy, minimizing risks while maximizing future improvements. Here are some examples:
- 17" screen is essentially a central control unit rather than just an infotainment system. Aside from web browser, GPS, HD rearview and other uses, most of the car's mechanical functionalities including steering, suspensions, ride height, headlights, etc. can be controlled here. What's even better is that all of these functionalities can be upgraded and new ones can be added wirelessly by Tesla firmware updates. This will also help tremendously with minimizing future recalls and also Tesla products having longer lives.
- Battery packs were designed to be swappable.
- Superchargers were designed to be upgraded by addition rather than replacement.
- Tesla's battery strategy incorporates proprietary packaging using cells from multiple battery suppliers (not only Panasonic). On the other hand, Panasonic is a Tesla investor (30 million at $21.15) and thus works deliberately for their mutual success.
18. Drivetrain Sales to Toyota, Mercedes and Future Partners
It's very hard to predict the progress of current partnerships' product successes, let alone the future ones. However, with Tesla's giant lead in technology from battery packs to superchargers, we can comfortably conclude that Tesla would profit handsomely if Toyota, Mercedes and other future partners succeed while having zero risk as it's the technology provider.
19. Tesla, SolarCity and SpaceX Current and Future Collaborations
Imagine you were the CEO of two companies and Chairman of a third one as well as holding more shares in each company than anybody else. Let's say these companies also had some of the best engineering teams in the world, working on some of the toughest problems. Wouldn't you have your genius teams collaborate on these problems whenever possible?
SpaceX and Tesla already use lithium-ion packs for their Falcon 9 rocket, Dragon spacecraft and Model S. Tesla recently started providing 8 Kwh battery packs to SolarCity while SolarCity has been installing solar panels for Tesla superchargers since September 2012. Within two years, SolarCity is hoping to introduce a package that includes both solar panels to capture the sun's energy during the day and batteries that can store energy, so consumers can use it at night.
This and other future collaborations will benefit all three companies for many reasons including technology improvement, larger orders/lower battery costs and supercharger stations having power storage, etc. This is just another invaluable factor to consider for both TSLA and SCTY investors.
20. Possibility of Tesla To Be Taken Over Close to Zero With $10+Billion Market Cap
Tesla's current valuation of $10+ billion but only 20K units a year production can't be justified by any company's due diligence departments. As profits and share price keep increasing, this possibility will eventually become zero. Plus, Musk repeatedly confirmed he will not leave or sell Tesla until he reaches his goal of electric cars becoming mainstream. Adding Toyota, Mercedes, Panasonic and institutional investors' ownership to Musk's ~30%, I really think a takeover is out of question but even in the event of one, investors will be rewarded a handsome premium.
Tesla Motors' Extraordinary Leader and Management Team
I kept this part separate since I don't even know how to value accomplishments of members of this team such as becoming the first private rocket company to reach orbit, delivering cargo to the International Space Station, building a car from scratch to be selected "the best car ever" by major publishers and so on. Many legendary investors emphasize investing in companies with solid and stable management teams that stick with their companies for the long term. Tesla has a management team that will be talked about for decades to come.
ELON MUSK, Chairman, Product Architect and CEO
No need for an introduction, Elon Musk is an extremely rare combination of a genius engineer and businessman. For those claiming Musk is just a sleazy, flamboyant CEO staging dog and pony shows to lure investors, I'd suggest listening to Musk explaining every single engineering detail on Tesla, SpaceX, SolarCity and even early PayPal technology. I must have watched or listened to at least 100 Q&A sessions of Musk from tech festivals to earnings calls and never once witnessed him dodging a question or redirecting it to a subordinate.
I'd nominate Musk for the CEO of the century award whenever it's due. Much respect to Steve Jobs but initiating online payments, reforming space transportation, starting the electric car revolution, progressing solar power will easily beat innovation in PCs, cellphones and tablets. Plus, the man is only 41; he already has other plans including a 5th mode of transportation called "Hyperloop."
Aside from Musk's current and future achievements, investors should also be very happy with how committed he is to all of his companies. He went through very painful times with Tesla and SpaceX, especially during the Great Recession, when he had to borrow money to pay his rent. He also repeatedly said he will not quit or sell Tesla until successful mass production is achieved, even confirming "Forgot to say one thing at Tesla annual shareholders meeting: just as my money was the first in, it will be the last out."
JB STRAUBEL, Chief Technical Officer
He was the CTO and co-founder of the aerospace firm, Volacom, which designed an electric aircraft platform using a novel power plant. He built an electric Porsche 944 that held a world EV racing record, a custom electric bicycle, and a pioneering hybrid trailer system.
GILBERT PASSIN, Vice President, Manufacturing
Some of you may remember him from the must-see National Geographic documentary "Megafactories - Tesla NUMMI" He has led some of the most high-profile production divisions at Toyota, Volvo, Mack and Renault in North America and Europe. He is definitely the right guy for the job to scale up Tesla's production.
FRANZ VON HOLZHAUSEN, Chief Designer
His design resume includes the Pontiac Solstice, Saturn Sky, Opel GT, Mazda RX-8, Tribute, Mazda 3, 5 and 6. With a resume like that and his contribution to the Model S and X, you can be sure Tesla's future products' design is in good hands.
"If I had asked people what they wanted, they would have said faster horses."
- Henry Ford
"People don't know what they want until you show it to them."
- Steve Jobs
Ford, Jobs, Musk and other rare visionaries know that the majority of people don't know what will be useful for them and they can be very hard to convince. Thus, you need to convince the innovators and early adapters instead, who will take care of the rest. This phase is currently in progress by Tesla Motors which is doing everything from making the best car ever to building supercharger stations around the globe to convince innovators and early adopters. Witnessing these innovators and early adopters drive around in long ranged and compelling EVs, enjoying all the benefits including better performance, fueling at the comfort of your home, electricity vs. gas savings, less maintenance, no tailpipe emissions and many others, the majority will surely shift to the better technology.
Tesla still has more work to do but at this point you can be 100% sure that electrification of cars is at a point of no return. Make no mistake, there are and will be many EV naysayers claiming they will never buy an EV in their lifetime, EVs are bad for this and that reason and so on. (Remember all those people saying they'd never buy a cellphone since "they don't need it" or all the baseless claims about cellphones such as causing brain damage, cancer, etc.?)
The more-than-a-century-old auto industry is on the brink of a revolution, an electric one. You have the option to either side with the ever-present generational naysayers, clueless analysts, etc. and waste your time or invest in ever-innovative and industry leading Tesla to capitalize on exponential gains. Once again, I think Tesla is an investment that will reward "true longs" much more than "market timers" since its products are unprecedented, technology improvements are unpredictable and for many other unquantifiable reasons such as the effects of word-of-mouth marketing.
Additional disclosure: I am long TSLA@$29, CMG@$282, KORS@$41.