Tesla's EV Impact: Location, Location, Location

| About: Tesla Motors (TSLA)

Detractors like to simplistically broadbrush Tesla Motors (NASDAQ:TSLA) as a company that is bleeding cash and sitting around praying that it can land a Model S on every block in middle America. The bearish story often posits a company without much of a plan; it's as if CEO Elon Musk is building cars in his backyard, hoping upon hope that a few million $30,000-a-year-millionaires will crawl out of the woodwork to buy one each. At that point -- and only at that point -- the cash will stop spending itself and Tesla will eke out a not-so-devastating loss.

Nothing could be further from the truth. Based on the comments I have received on recent TSLA articles I have written, particularly this one, many investors seem to misunderstand Tesla's market, the market for electric vehicles (EVs) in general, and my bullish position. First, a few points of clarification because I realize that I may not have done a sufficient job explaining my position:

Note the fine but relevant distinction between those two components of my position.

  • Millions of people do not have to buy an EV from Tesla for Tesla to be successful.
  • Millions of people do not have to buy an EV from any one EV maker for the larger EV market to be successful.
And, maybe most importantly:
  • All that really matters for EV sales, particularly when discussing the prospects for a luxury brand like Tesla, is location.

Take a look at two key illustrations, along with some commentary from a recent study by Pike Research, that help drive home the points I have been trying to make. "PEV" stands for "Plug-In Electric Vehicle."

[Click all to enlarge]

Click to enlarge

Click to enlarge
The first chart, as Pike Research explains, "is essentially a measure of the availability of product for potential consumers." The second, and the attendant commentary, comes as no surprise. It supports my contention that location-specific sales to a very small and focused subset of customers will drive sales for Tesla and other EV makers.
To help prove that Tesla actually does market research and has a plan, I request that you look to the locations of their North American retail outlets.

Click to enlarge

Stunningly, the locations match up quite nicely with the geographic conclusions Pike Research came to. Tesla has five stores in California, one in New York City, one in Chicago, one in Phoenix, and one in Seattle. There's a method to the madness after all. The only beef I might have with the company is going with such an aggressive approach globally; I don't think it's necessary.

I think some bears have the disadvantage of living in Anytown, USA. When you live in Anytown, you operate from an automatic disadvantage. When you live in one of the nation's most desirable places -- generally, places with expensive real estate -- you have a different view on these types of debates.

Living in major metropolitan areas can equate to living in a bubble. On the flip side, living outside of these spheres of affluence can be tantamount to leading a sheltered life. At day's end, you create your own reality. All of us should be careful not to extrapolate it out to the rest of the world. Tesla bears seem to be doing this, assuming that because the average Anytown resident cannot afford or simply does not want a Roadster or Model S, Tesla will not be successful. Tesla bulls seem to realize that Anytown has no place in this debate.

This is where the Apple (NASDAQ:AAPL) model I often refer to comes in. I have attempted to explain my position on this before as well. Here's my contention in pretty straightforward terms. First, the obvious part. Tesla retail stores are more like Apple stores than auto dealerships. They allow anyone to come in so they can look, feel, and become educated on Tesla products, even if they cannot afford them. It's akin to somebody without the means to buy an Apple computer -- yet -- having the unfettered ability to check his email, every day, on a Mac at his local Apple store. This type of retail environment creates a "scene," so to speak, and an incredibly valuable buzz and word of mouth.

Apple's products have become increasingly affordable for the masses. Consider the trajectory of iPod, from Classic to Shuffle. Yet some remain out of reach, or at least out of the financial comfort level, for many.

While not along the exact same line, Tesla's yet-to-be completed evolution from Roadster to Model S to Model X runs alongside Apple's model.

Like Apple does, Tesla kills two birds with one stone by locating its retail stores in high-traffic areas traversed by the well-heeled who can buy their products as well as those who have anywhere between a passing to keen interest. The result of the approach, once again: "scene," buzz, and word of mouth. And, of course, sales and loyalty, all steeped in the cool factor.

If Tesla can find success in this strategy, not only will it thrive, but the broader EV market will as well. Electric offerings from Nissan (OTCPK:NSANY), Ford (NYSE:F), and other major players will reap the rewards of pent-up demand for the Model S. And, of course, other luxury EVs from the likes of BMW and others will compete head-on with the Model S.

I'm not sure where the confusion comes in over Tesla's future. The early results indicate that considerable demand exists for its products. As of the end of March, the company has over 4,300 pre-reservations for the Model S. The bears would have you believe prospects for success are low at best. While there's no guarantee things will pan out as I forecast, the company has a handle on its business, despite attempts to make it appear otherwise.

Outside of dollar-cost-averaging into the stock, as I am, using options to get long makes sense. Selling puts at strikes you would feel comfortable buying the stock at can work well for some investors. Others might consider executing straight long call purchases on TSLA LEAPS options. The TSLA January 2013 $30 calls, which closed at $6.20 on Friday, provide a lower-risk way -- relative to buying shares outright -- to profit from share price appreciation in the stock over the next 12 to 16 months.

Disclosure: I am long TSLA.