Tesla Vs. Competitors: More Pain Ahead

Nov.12.13 | About: Tesla Motors (TSLA)

In the past few weeks, I've extensively covered Tesla's (NASDAQ:TSLA) stock price laying out different scenarios that led me to believe that Tesla's stock price was extremely overvalued as shareholders were ignoring potential risks. The last of the articles, Tesla: 15% Drop - Only the Beginning of Crash, coincided with news of another Tesla fire, which resulted in more pain for Tesla's investors.

Since my first article was published, Tesla's stock price dropped by nearly 22% and has since recovered some losses. One of the risks I discussed as critical in the coming years will be the risk of competitors flooding the BEV market. In this article, I will introduce one of Tesla's future competitors, Ford (NYSE:F), as the company could be only one such automaker among many that is well positioned to wage an attack on Tesla's Model E.

First, about that fire…

Do I believe that one Tesla vehicle (of the 19,000 Teslas on the road) catching on fire as a result of a metal tow hitch rapidly striking the undercarriage of the vehicle spells trouble for Tesla?

First, let's separate the near-term stock price & the company's longer term future. In the near-term, each time the media pounds on Tesla in the event of a Tesla fire, the company will continue taking a beating in the market. As Tesla places more vehicles on the road, it is likely that 1 or 2 more might be involved in some sort of a crash somewhere around the world - potentially causing the vehicles to catch a fire. It's unfortunate for Tesla's longs that the media finds these fires so fascinating and immediately concludes that they were the result of Tesla's 1000 pound lithium-ion batteries. While this could certainly negatively impact the company's near-term stock price, it will likely not hurt the company's longer-term success. In fact, I believe that Tesla could use these fires to their advantage if the company comes up with a better solution to its undercarriage problems - for instance, if they create a thicker shield in place where the metal debris appears to be piercing through the vehicles. This longer term solution, while possibly could increase costs in the near term, could also potentially create a better, safer Tesla vehicle in the future.

Now on to Tesla's competitors!

In my prior articles, I've maintained that investors should be extremely cautious of competitive risks that exist in this BEV space, especially now that BEV appears to be a proven and potentially disruptive market. As the table below shows, the US BEV market could easily grow from an estimated 48,000 vehicles in 2013 to almost 500,000 in 2020. That's only in the US!

Click to enlarge

The BEV market could continue to also grow in Europe and China, where Tesla would be one of many such players.

But important questions remain. At what point will Tesla's competitors start allocating more capital towards BEVs and dedicating resources towards improving their electric vehicle models? With huge cash positions, will competitors use a price war to fend off Tesla once the Model E is ready for production? Where will Daimler's (OTC:OTCPK:DDAIF) Series B Class as the "most compelling sort of four wheel electric car in the market," at least according to Musk, position Tesla's Model E?

Before I continue, I recognize that there are those who maintain that Tesla has no real competitors. This is a view I entirely disagree with. As we compare Tesla to one competitor, Ford, we find that the automaker has a vehicle with a $35,000 base price, a BEV named Ford Focus (Musk plans to base price Model E at $35,000 as well).

So let's compare…

Ford is essentially extremely levered and has the most cash to wage a battle against Tesla. While I believe the automaker will have to produce a vehicle that is more aesthetically pleasing than its Focus offering before 2016, the vehicle nevertheless represents a potential challenge to Tesla's future Model E.

Ford's current position relative to Tesla is as follows:

In unit terms, the company will produce close to 4.5 million cars in 2013 (mostly ICE), which is 200 times more vehicles than Tesla will produce in 2013. At the same time, Ford's stock is only priced less than 4 times as much as Tesla's, at 12X P/E (NYSE:TTM). Ford operates on $201 billion of capital, 31% of which is cash and equivalents. That compares to total capital of $2.2 billion over at Tesla (100X less), of which 37% is cash and equivalents.

In market opportunity terms, if the auto market (the whole auto industry) continues to grow in US, Europe, and China by 5% per year, by 2020, we'd be looking at 72 million cars sold in these regions combined in the year 2020. Keeping Ford's market share flat in these regions would translate to Ford selling 6.29 million units, or 22 times as many vehicles I projected Tesla to be selling during that same year (285,000 Teslas in 2020). So by 2020, Tesla would be closing the gap between one rival, but it'd be nowhere near a competitor's production levels even with its aggressive growth rate and international expansion.

Add other competitors to Ford - specifically Daimler, BMW, GM (NYSE:GM), Toyota (NYSE:TM), Honda (NYSE:HMC), Nissan (OTC:NSANY),et al, and you've got a serious fight that will likely take place in the BEV space as the industry develops (WARNING: Tesla will not have 42% of the US market like they do today).

The others also have sophisticated distribution networks to boost demand, while Tesla will be using a much weaker distribution, namely a website and a few retail locations, to fulfill demand. It will be important to watch Tesla as the company addresses that weakness before 2016.

But other innovators have developed sustainable business models with no competitors in sight; Why can't Tesla?

Yes, Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), and LinkedIn (NYSE:LNKD) have been nearly untouched in their roads to innovative success. However, these companies were all different than Tesla as they all successfully created strategic and competitive advantages that prevented rivals from replicating their business models and challenging them in their space. Netflix created its own shows to prevent rivals from stealing share, Amazon used fewer warehouses than competitors, passing on the savings to customers, and LinkedIn aggressively loaded professionals onto its site using the freemium model (Facebook (NASDAQ:FB) style) and then aggressively sold seats to recruiters and corporations who wanted access to the professionals' information. Even so, in my opinion, Amazon will have to eventually surrender market share of its e-commerce space with competitors like Best Buy (NYSE:BBY), Wal-mart (NYSE:WMT), and Target (NYSE:TGT) as they tweak strategies to close in.

Comparatively, unlike these companies, Tesla's strategic advantage, the charging stations infrastructure, could easily be replicated. Electric stations could easily be placed by competitors in collaboration with each other to fend off the Tesla threat.

Where does that leave Tesla?

The bottom line is, Tesla is fighting a challenging battle in which they are underdogs competing against seasoned rivals. While I do believe that Tesla as a company has a bright future ahead, their stock price belongs in the $80-$100 range today if discounting is appropriately used from forward levels. This would be 31% to 44% below its current value.

Disclosure: I am long F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is intended for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation, or endorsement to buy or sell any security or private fund.