Somehow, in the country that describes itself as the most free in the world, there are actually states that have regulations that bar the sale of Tesla (NASDAQ:TSLA) vehicles directly to consumers. Direct selling to consumers clearly offers benefits to buyers, as they do not have to pay the middle man who sells them the vehicle. To show the level of enthusiasm for having Tesla cars be sold directly to buyers without the dealership, there have been several polls done on the issue. According to a Triangular Business Journal poll, 97% of respondents stated that Tesla should be allowed to sell cars directly to consumers. Another poll done by the Austin Business Journal had 86% favoring this policy as well. Therefore, it is clear that the public favors the changing of this regulation. If this occurs, then it would be a positive catalyst for the stock to move higher. I personally wouldn't buy the stock because it is too richly valued. This article will elaborate on this positive catalyst that could make the stock go up. Currently 5 states ban the sale of cars directly to consumers, including the hugely populous states of New Jersey and Texas.
This is a large bottleneck to the company's sales. Hopefully, it will be resolved in the near future. It would be great for the consumers and Tesla.
In a letter written by Elon Musk to the citizens of New Jersey, Elon describes why these laws were passed in the first place. These franchise dealership laws were meant to prevent manufacturers from competing with dealerships that had to put up a huge upfront cost to start their business. Most of the dealerships are family owned. This made legislators more inclined to pass the law. The idea of protecting small mom and pop businesses from the big corporations is the basic principle at work here. The problem is that these laws truly stifle competition and cause the consumers to pay more for vehicles. Tesla is a disruptor, which is trying to change the dealership model. With every example of a disruptor trying to change an industry comes a large amount of pushback from the entrenched players in the industry who don't want to give up their profits. As is often the case, the government is siding with the entrenched businesses instead of the disruptor. This doesn't mean that Tesla will not break through. I will update you on different states' outstanding legislation changes. The ability for Tesla to actually sell cars in certain states will be a big deal for the company. Tesla's model not only disrupts the dealerships at the point of sale, but it also disrupts the major profit centers for the businesses, which is car repairs. If you analyze Penske Automotive Group, which is one of the publicly traded automotive dealership companies, you will find that 44% of the company's gross profits came from its services and parts divisions. Elon Musk doesn't believe in making profits off of the customers after the sale. Therefore if the Tesla cars were ever sold in dealerships, the dealers would never promote the electric cars because of the lower amount of profits that they would make off them.
Before I go into more depth about specific states' legislation, I would like to state that car sales can occur online. Galleries also are allowed to exist in these states. The galleries cannot offer test drives and cannot talk about the prices of the vehicles. This clearly is a problem for Tesla. The states where Tesla sales are banned are New Jersey, Texas, Maryland, Arizona, and Virginia.
The first state that I am going to discuss is Texas. Texas is obviously important to Tesla as 1,500-2,000 of its 10,000 cars sold were in the lone star state. Currently Tesla operates two galleries in Texas, which are in Houston and Austin. These galleries cannot offer test drives to consumers, so this is a huge hindrance to Tesla's ability to sell cars. Because Tesla owners have to take ownership of the car before they register it, they have to pay up to $5,000 in registration costs upfront, instead of rolling that fee into the car loan. Due to these cumbersome regulations the Tesla galleries aren't allowed to advertise that they do warranty repairs and customers have to go through the Tesla headquarters in California to get repairs done in the Texas galleries. Having cumbersome regulations certainly go against what Texas is known for. The state was rated as the second best for businesses in America. Governor Rick Perry is known for being friendly to businesses. Besides these two factors another very important issue is at play. I believe that this issue will allow Tesla to get the franchise dealership laws to be overturned. This issue is the fact that the company is still deciding on where it will be building its battery manufacturing plant (gigafactory). The factory will create 6,500 jobs and add $4-$5 billion of investment to whichever state gets the factory. The logical reason why the company is waiting to decide where it builds the plant is that this power over the states will give it influence over the legislation that it wants to be passed. The two states that are in the running for the Tesla plant are Nevada and Texas. Rick Perry has expressed interest in having the Tesla plant built in Texas and has put forward many tax incentives for the company. Since the governor has also stated on CNBC that "the pros of allowing this to happen are going to outweigh the cons" when referring to having the franchise dealership laws revoked for Tesla's sake, it seems that all signs point to the laws being changed. If the dealership laws are changed, it could have an effect on other states' regulations. This would be a huge positive for the company.
The next state that I will discuss is Pennsylvania. The recent legislation that passed in Pennsylvania allows for 5 Tesla galleries to sell cars directly to consumers. The legislation was a give and take for both sides. The dealership lobbyists know as the Alliance for Automobile manufacturers got the legislation to only include Tesla cars and Tesla was allowed to have 5 locations sell cars. While this decision does cap the amount of stores at only 5, it shows that public pressure on the issue can cause legislatures to change their ways. The fact that the lawmakers are beginning to not act completely beholden to the franchise dealers is a step in the right direction. This provides much needed momentum to eventually have more stores allowed to be opened, as these types of laws are battled in other states. Elon Musk has talked about filing a national case, if he is stymied at the state level. Laws like this may make that unnecessary. The unanimity with which the vote on the law was cast with is also encouraging as the vote was 197-2. While it shouldn't be necessary in America for Tesla to have to get involved in this type of litigation, it seems as though the company has learned how to compromise in order to get part of their end goal to happen.
In the state of New Jersey the legislation is in the process of being passed, as the Tesla bill is being hitched onto other legislation. Currently there is legislation being debated between the car manufacturers and the dealers. If the Tesla ruling is added on to this potential law, it will have huge ramifications for all parties involved. The ability of Tesla to sell cars directly in its two stores was halted in April. This law would hopefully reverse this. The reason to be optimistic about this situation is that if the bill that pits manufacturers and dealers against each other favors the dealers but also favors Tesla in the process, the dealers will probably approve of it. A limit to the amount of cars being sold may be discussed. This would be similar to the limit that Pennsylvania put into place. The president of New Jersey's Coalition of Automotive Retailers stated in response to Tesla being allowed to sell cars directly to customers "politics is the art of the possible, and I think it's not an ideal solution, but it's one we can live with." This type of rhetoric is a positive sign that Tesla will get a positive solution to once again be able to sell cars in their stores.
This legislation in these three states will set the stage for other states to follow. This is why I focused on these three.
The investment decision based on this thesis would be to go long Tesla. Obviously this is only one part of the equation and other factors will need to be looked into. I would not recommend Tesla based on its enormous P/E multiple, but it is still worth considering the possible positive catalysts that the stock may have.
The risks to this thesis would be that the politicians do not act in favor of freedom and free competition. Politics is a messy sport and often has legislatures not act in the best interests of the electorate. It is easy to see this as our country does nothing about our skyrocketing debt. The leap that this thesis makes is that the state governments are run slightly more efficiently than the national governments and proper laws usually end up getting passed. Obviously if I am wrong and the entire country bans the sale of Tesla cars directly to consumers, then the stock of Tesla will decrease in value.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.