Someone once told me that just because a company innovates enough to completely change an entire industry, that does not mean that it will reap the financial benefits of this innovation. These days this could not be more true. What matters most is not how much innovation a product brings, but how it is presented, its simplicity, its package, and the branding behind it. Look at Apple for example: nearly all of the technologies that they use have been used before, but it is the way they combine these technologies and present them that makes the difference.
Now that that’s over with, let’s talk about Tesla Motors (TSLA) and why the risks that come with investing in this innovative company are not all that significant. Let’s first look at some of the major risks at play:
- Battery-powered cars are not and will never be suitable for the US and global market. This has been repeated over and over again all over the news and blogs that talk about electric cars, and to be honest, it has a high chance of being true. I do not think that companies like General Motors (GM), Ford (F), and Toyota (TM) will succeed in the EV business in the near future, a point made by many writers and analysts. For example, see:Seeking Alpha article. However, these writers and analysts make a mistake in including Tesla with these automotive behemoths. If you think about what I said in the beginning of my blog post, things shape up to look like this: Tesla is a disruptor and a heavy innovator in the automotive industry, but that does not guarantee it financial success. However, that is not all that Tesla has become. It has presented its products with a simplicity, beauty, design, and branding that I believe can line up with the best (let’s say Apple (AAPL)). A Ford EV is still a Ford, and as long as it is expensive and impractical it will never sell well. However, a Tesla EV is a Tesla. It could not have been a gas-powered car, it only exists in electric. Carrying the Tesla brand is like carrying a package of innovation, intelligence, environmentalism, performance, and luxury. The Tesla does not have to be the cheapest and most practical car. It is a luxury good, one which will sell into a niche market that undeniably exists. I mean, when someone buys a Lambo or a Ferrari, practicality and cost-efficiency rarely plays a factor —- I believe that Tesla vehicles will be seen similarly by enough customers to make it very successful.
- Larger competitors, such as Ford, GM, Toyota, and Honda (HMC), could use their scale to strangle Tesla. First of all, Toyota has made a deal with Tesla to use its technology in its future EVs. But that is not even that significant. The idea that large carmakers will be able to sell huge amounts of EVs anytime soon is crazy —- it will never happen. Until electric cars go down in price significantly because of new battery technologies, and become as functional as normal cars, they will remain luxury goods that cater to a niche market of interested buyers. The scale simply is not going to be there any time soon, and so EVs will remain luxury goods for individuals that care less about cost. In this kind of an environment, the large carmakers cannot compete with Tesla, as all of their competing models are less performant, much, much uglier, and have worse brand image than Tesla’s products. I mean, would you rather own a Tesla Model S or a Nissan Leaf? See for yourself: Extreme Tech Article.
- Improvement in other technologies, such as hydrogen-powered fuel-cell cars, could make EVs redundant. This is a fair point, but it is extremely speculative. I will counter this speculation with my own speculative comment: Elon Musk, the man that runs SpaceX, the company that will provide Nasa with its next space-going Vessel, has probably looked into those technologies and decided that battery power is the best option for his company. But even if such a technology did come out, Tesla would have built such a strong brand image by then that it would still have a strong niche market to sell to. Let’s not forget how quickly and accurately Tesla has been executing its releases so far —- it’s not crazy to say that it would be able to adapt to new technologies much faster than other carmakers.
By now you can see that investing in Tesla is not as risky as you may have thought. It’s not like investing in A123 Systems (AONE), a company whose brand image does not matter and that could be completely replaced by any competitor that offers a more performant battery and that has the ability to mass-produce it (See my other blog post —- A123 Systems). Tesla will also be helped by things that cannot be ignored:
- Rising fuel prices. Petrol cars are not the future anymore, and cars running on alternative fuel prices are becoming more-and-more cost-efficient. We will not be able to produce more fossil fuels to always increase supply and keep prices low, but we will be able to eventually reduce the prices of large batteries.
- The “cool factor”. We saw it with the Toyota Prius Hybrid, which was an atrociously ugly car. How cool will the even more environmentally-friendly and extremely beautiful Teslas become?
- International issues. The US imports most of its oil. Who wants to guess what would happen to oil prices should a major war or conflict break out again in the Middle East?
Tesla’s critics almost always base their points on the failures of the current EV industry. They rarely criticise Tesla itself, and for good reason —- it is a great company that owns an amazing brand and makes beautiful, high-tech products. It also delivers on its promises. I think that this innapropriate generalising of the failure of electric-car sales is what makes this stock so undervalued and over-criticised. This is why I am calling a “critical point” on this stock in the foreseeable future. Tesla Motors will turn the corner and gain recognition for the great company that it is, and it’s up to you to get in on time if you believe it.
What do you think is the most important thing to consider when thinking about investing in Tesla Motors? Comments are welcome below.