Tesla Will Become The Victim Of Its Own Success

Aug. 8.14 | About: Tesla Motors (TSLA)

Summary

Tesla is currently priced as if it is selling hundreds of thousands of vehicles per year, while in fact sales will be only 35,000 units for 2014.

To justify current stock price, it will need to achieve its 2020 goal of selling at least 500,000 units per year.

Increasing competition as well as likely loss of Federal EV subsidy long before many competitors, are great impediments to coming close to such a high sales volume.

There is no doubt at this point that Tesla (NASDAQ:TSLA) managed to capture the imagination and enthusiasm of the investment world. The company is currently valued at roughly $1,000,000 per vehicle expected to be sold this year. It is true that these are not your ordinary vehicles in terms of not only technology but also price. The base price of the Model S is about $70,000 in the US. Still, the only way to justify such valuation for a company is if one can claim that sales volume will soon catch up to the company's valuation.

Based on a comparison to another luxury car maker, Daimler (OTCPK:DDAIY), Tesla would have to sell at least 500,000 vehicles per year to justify the current stock price. Daimler's current market cap is about $85 billion, with over 2.5 million vehicles sold last year. Tesla's market cap is currently almost $31 billion. It is true that Tesla's sales growth has been impressive so far, with over 20,000 cars sold worldwide last year and 35,000 cars expected to be sold this year. Expectations for next year are even more impressive, with the assumption that as many as 60,000 Tesla cars will be sold next year. There are also high expectations for 2017, which is when the Model 3 (formerly known as Model E) will be released. It is meant to reach out to lower income demographics with a price tag in the $35,000 range for a base model. Still, current valuation defies all logic, because despite the positive trend seen today, the company's stated goal of achieving sales volume in the 500,000 units range by 2020 is far from being achievable.

I see two major hurdles that will most likely prevent Tesla from coming close to reaching the 500,000 per year sales volume by 2020. The first one is increased competition in a market that is growing rapidly but is still a niche market, and there is no indication that it will move out of niche territory any time soon. The other hurdle is the US Federal Government EV subsidy policy which may make Tesla a victim of its own relative success by giving an advantage to the competitors.

The Competition:

There is no doubt at this point that as far as all-electric cars go, Tesla is undisputed leader when it comes to range. In fact, competitors such as the Chevy Volt cannot be considered to be all electric powered cars, given their comparatively limited electric only range. The Chevy Volt has a range of only 38 miles on its electric charge. There is also the BMW i3, which has a range of 81 miles with the option to purchase the range extending gasoline powered engine which gives it the option to travel a combined 140 miles with the electrical charge & the gasoline powered engine. Tesla makes all-electric cars such as the Model S, which can have a range as high as 300 miles, depending on the option, and the Model X which should have a range that may be as high as 260 miles. The Model 3 which is due to come out in 2017 will have a range of 200 miles. So needless to say that Tesla is far ahead of the competition at this point.

Yet, if we think about it, the BMW i3 in many circumstances can be a preferable option, given its dual electric-gasoline power feature. For instance, despite the much higher electric range, I would have a very hard time making it from Omaha where I currently live, to visit family and friends in Winnipeg where I grew up, in a Tesla. The 650 mile trip would take me a very long time, given that I would have to stop and plug it in at least twice along the way and there are no charging stations along Highway 29 as far as I know. In other words, I would have to stop at a motel and kindly ask to plug in my car for a charge. The BMW i3 would take me there same as my current conventional car does, given that it has sufficient gasoline powered range to take me from one gas station to the next, even along such a sparsely populated route.

There are other considerations as well, such as dependence on the grid in order to ensure personal transport, which is not always comforting. A gasoline powered car can be fueled more easily given that many households do have a few gallons of fuel sitting in a can in their garage. Gas stations can run on generators, making it possible to dispense fuel even if the grid goes down. On the other hand, even if one has a back-up generator at home, which few households do, it would be a very tough choice to decide to use the power generated to charge one's all-electric vehicle in an emergency situation, rather than make sure that the fridge has power.

Aside from these considerations, there is the price issue. A Tesla Model S starts at $70,000 before all government subsidies are included (link). The Model X crossover will be a little bit more expensive with a base price of $80,000. I should note that the average selling price of the Model S is actually about $90,000. The Model 3 is presented as the choice for the average Joe, but the starting price is still going to be about $35,000, which is still far from being viewed as affordable for most households looking to buy a small car. Most average households that are willing to purchase a car in that price range are looking for an SUV or a truck in order to take care of a wider range of transport needs most households have.

Mercedes offers an all-electric with an 85 mile range for as low as $34,000 (link). The BMW i3, with the range extender is available for $46,000 (link). The Nissan Leaf, which I think will be among the more formidable competitors for the Tesla Model 3, sells for $29,000 (link). These are just a few examples of the competition. We should also remember that all the cars I mentioned here have the backing of well-established car companies, with extensive mass-production and sales facilities. The global EV market is small but growing exponentially. In fact global monthly sales doubled just in the first seven months of this year (link). There may be room to grow, but there will be plenty of competition and I believe Tesla's competition will become more and more fierce.

Loss of US EV subsidy.

There is a provision in the US federal government subsidy policy for EVs, which states that subsidies will be phased out once the manufacturer sells 200,000 EV vehicles on the US market (link). Tesla will most likely be one of the first EV makers to surpass that mark, which will then trigger the phase out of the subsidies, leaving the competition to benefit on pricing by as much as $7,500 per car. Given Tesla's current US sales trend, it is most likely that the loss of the Federal Government subsidy will occur at the worst possible time, which is very soon after the more affordable Model 3 will hit the market.

This disadvantage on the US market could last for many years given that there are now a dozen or so competing EV brands, including many which just started selling in the US market or are about to soon. While Tesla will probably continue to hold an edge in terms of range for the rest of the decade, the edge in price certainly seems to be tilting towards the competition and is likely to get wider. Range superiority is unlikely to make up for the pricing gap given that many competitors offer about 80 miles of range, which is enough for most daily routine trips, while models such as the BMW i3 are better suited for the out of the ordinary situations, such as a long road trip, because it has the gasoline powered range extender, which makes the car viable to drive in less populated parts of the continent.

Taking all these factors into consideration, I believe that Tesla is not likely to come close to achieving sales of 500,000 vehicles per year within a reasonable timeframe, such as by the end of the decade. The total global electric-only market doesn't even come close to achieving such a sales volume at this moment, if we are to ignore the brands that do not stand out as mostly or all-electric cars. The electric car is likely to remain a niche market for the foreseeable future and the competition in the field does have a few advantages over Tesla. The only major advantage that Tesla has at the moment is its range. I believe that given the seriousness with which firms like BMW, Nissan, Volkswagen, and Mercedes are now treating the EV, it is likely that their resources will eventually help narrow down Tesla's range advantage as well. In the meantime, the company is valued as if it already achieved sales volume of 500,000 per year, which means that even if Tesla were to be able to come close to such a volume, it is already priced into the stock. I am going to state the obvious here, which is that people are generally looking for investments with upside potential, which it seems to me that for the longer term Tesla has very little, if any, left.

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.