Tesla Stock Misunderstood: It's Undervalued

| About: Tesla Motors (TSLA)

Summary

Over the last year and a half, oil prices have collapsed, spooking markets generally and Tesla investors in particular.

The data shows a very different pattern. As oil has fallen, TSLA's sales have continued to accelerate, showing no correlation to oil prices.

On balance, the advantages offered by Tesla cars outweigh the drawbacks for many car buyers to the extent Model S dominates the US car sales in its price range.

Given the market's irrational concern for Tesla demand due to collapsing oil prices, the company is likely undervalued at this time.

Tesla Motors' (NASDAQ:TSLA) shares are down. The whole stock market is down. A lot. Every investment these days seems to carry enormous risk, and high-flying growth companies, such as Tesla, seemingly embody more risk now than ever before. The falling price of oil is seen as a driver of overall economic discomfiture. But do falling oil prices matter for Tesla or are investors overreacting?

Oil

In the last year and a half, the price of oil has fallen dramatically, and with it, the price for gasoline and diesel fuel. This has diminished the case for electric cars that carry a price premium buyers must justify on the basis of fuel savings. Tesla makes electric cars. Necessarily, TSLA's sales must suffer with low oil prices. There can be no hope for the company until OPEC raises the oil prices again. Such is conventional wisdom.

But Tesla's Model S doesn't carry a price premium compared to other luxury cars of similar size and performance. In fact, Model S offers acceleration performance that exceeds that of any other sedan you can buy, regardless of price. In the US market, Model S is the best-selling car in its price class. Period. Model S outsells Audi's (OTCPK:AUDVF) A8, Mercedes (OTCPK:DDAIY) S Class, Porsche's (OTCPK:POAHY) Panamera, BMW's (BAMXY) 6/7 Series. Tesla is giving the best cars and most advanced carmakers a run for their money. Even as oil prices are crashing.

Quarterly oil price and Tesla Model S Sales Click to enlarge

As the price of oil has plunged, sales of Tesla's Model S have seen accelerating growth.

Data from EIA and Tesla

As this chart shows, Tesla's sales are uncorrelated with oil prices and continue to accelerate. The company's experience with Model S shows that an electric car priced comparably with similar ICE cars, and which is a compelling car in its own right, will sell regardless of the price of oil.

Tesla's coming Model 3 car will target BMW's 3 Series as Model S has targeted larger BMWs. Analysis of likely Model 3 characteristics suggests Tesla's smaller car will be compelling too. The question is to what degree fuel costs influence buyers looking at Model 3?

Model S has lower "fuel" costs than the large BMWs, Audis and Mercedes ICE cars against which it competes. This is true even with today's lower gasoline prices. This advantage is less than it was when gasoline prices were higher, but it is still an appealing characteristic of Tesla's Model S. Model 3 will be in much the same competitive position against BMW 3/4 Series, Audi A3/A4, Mercedes C Class, Lexus IS 250/350 ICE cars when it comes to "fuel" cost.

There are however many differentiating features between Tesla's Model S and competing ICE cars. Lower fuel cost is just one differentiator. Some of these differentiators are advantages for Model S, and some are drawbacks. Judging from the commanding position Model S has in the US market compared to rivals, these differentiators balance out in favor of Model S in the eyes of many potential buyers of cars in the Model S price range.

Advantages

  • Lower "fuel costs"
  • Touchscreen controls
  • Over-the-air updates
  • Autonomous driving features
  • Smooth, quiet operation
  • Excellent acceleration
  • Good handling
  • All-wheel drive
  • Convenient home charging
  • "Free" road trip rapid recharging
  • Destination chargers dedicated to Tesla cars
  • Excellent crashworthiness
  • Attractive design
  • Aspirational brand
  • Rear-facing child seats with five-point harness
  • No franchised Tesla dealers

Drawbacks

  • Longer roadtrip "fueling" times
  • Shorter un-refueled range
  • No rapturous exhaust sound
  • No selectable transmission "gears"
  • Limited availability and distribution of "fueling" stations
  • Less opulent interior
  • Cramped rear seat headroom
  • Small manufacturer with limited heritage
  • No franchised Tesla dealers

Continuing success of Model S in competition with high-end ICE cars, even with collapsing oil prices, shows that fuel cost savings is far from the dominant differentiator of Tesla cars. It is the other Tesla differentiators that buyers have found on balance make Model S compelling.

Model 3 will offer generally the same Model S advantages and drawbacks. It follows that Model 3 can be expected to sell well in the market segment at which it is targeted.

Conclusions

Investors have exhibited great concern for the effect of falling oil prices on the demand for Tesla's electric cars. This concern is shown to be irrational as Tesla's sales have continued to accelerate even as oil prices have collapsed.

Of course, just because markets are irrational does not mean they are not real. Rapid decline and great volatility in the price of oil has spooked investors generally, and the particular argument that Tesla demand is imperiled by falling oil prices resonates with the market even though the data clearly shows this argument is incorrect.

To the extent that investors continue to value TSLA's shares on the basis of a factually incorrect argument, the company is and may continue to be undervalued.

Disclosure: I am/we are long TSLA.

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.