1% Of The 1% For Tesla

| About: Tesla Motors (TSLA)

I recently wrote about Tesla (NASDAQ:TSLA) comparing it to its forefather Ford (NYSE:F). In the article, I talked a little about some of the strengths and the weaknesses of current TSLA picture and how they correlate with F, hoping to add color to the discussion of TSLA's future. TSLA is one of the most recent and promising companies to take a shot at carving out a permanent niche in the auto market for electric vehicles. They started out by producing about 2000 Roadsters, an over $100,000 sports car which has largely been considered a success. Now TSLA is aiming at the luxury sedan and SUV market, with its Models S and X. With around 8,000 pre-purchase deposits already made for the Model S, the first buyers are scheduled to take ownership this summer. Shares of TSLA have roughly doubled since its IPO in 2010, although stakeholders are highly polarized, with about 50% short interest.

I wanted to follow up on one of the questions that I asked in my previous article, which was "are there 30,000 people that would rather pay $50,0000+ for an electric vehicle instead of a gas powered Lexus, BMW, or Audi etc.?" TSLA is hoping to sell 30,000 of the combined Model S and X vehicles over the next year or two, which have a base price of just under $50,000 and are expected to compete directly with gas powered equivalents both in performance and market share. At first the question was almost rhetorical, I was not sure if there was any way of answering it with any added value. 30,000 electric cars sounds ambitious especially when they are going after the luxury market with an EV, not even the hybrid market, but then again there were over 81,000 luxury sedans sold in the U.S. in February, 2012. Chevy Volts seem to have shorted-out so to speak, with claims that they are too expensive. But Volts and the Model S are not really apples to apples. Still, after mulling it a bit, it made me want to explore just how many people out there might want to become early adopters and buy one of TSLA's new offerings.

I decided to try and answer that question on more than a perfunctory basis. First we have to consider that not all people who buy one of the new TSLA models will really be deciding between it and another car. Some will buy a TSLA just for the heck of it, or as a collector's item, to save on fuel costs, or to save the planet, and probably many other reasons. But the question as posed is still worth trying to answer because in a lot of ways, since it has yet to post actual profits and is still indebted to government grants, TSLA's initial success will be based in many ways on meeting that target. Since they are a quite unique company in an even more unique market (electric vehicles), there seems to be a dearth of directly comparable data. I considered looking at data from Roadster and other electric sports car segments, but they are incomparable to where TSLA is going with the Models S and X because they are 2-3 times the price. In spite of that, in the Roadster vein, I decided to take a shot at the question coming from the angle than anyone who is willing to buy one of TSLA's cars, is still going to be financially wealthy. While TSLA plans to produce a vehicle for the "masses" in the future, the Models S and X are squarely aimed at the luxury market, with buyer costs on the high end approaching $100,000. Now there are many differing definitions of wealthy, but one of the old standbys is being a millionaire. We cannot assume that all TSLA buyers will be millionaires, in fact some may not be anywhere close, but it may be a place to start.

Currently in the United States according to the Annual World Wealth Report, there are about 3.1 million HNWIs (High Net Worth Individuals). HNWIs have over $1 million in personal assets, outside of their primary residence. Out of over 300 million U.S. residents, that means we are talking about the top 1% of Americans. For these citizens, buying a Model S or X will amount to as much as 1/20 to 1/10 of their liquid net worth. Perhaps to the chagrin of the 99% that the Occupy protests of 2011 made famous, for TSLA to have a successful first real production run of 30,000, only 1% of the 3.1 million HNWIs in the U.S. need to purchase one of its vehicles. So TSLA would need about 1% of the 1% to buy a Model S or X to meet their initial goal. In spite of my initial concerns about having enough people to meet its goals, this helps frame the picture of how many people can buy one of TSLA's cars.

While the luxury car market is relatively small and shrinking, and the broader car market is growing, the luxury EV still definitely has a shot at carving out a niche. And keep in mind that this exploration bypasses that TSLA is selling to a global market (which has over 10 million HNWIs), so they really need less than 1% of the U.S.'s 1%. This all sounds pretty good for TSLA, but of course there is a plethora of other factors and risks to consider such as battery performance, pending safety tests, and the manufacturing itself before investing in TSLA. With about 50% short interest on the stock, it is not exactly a clear enough picture for the average investor to start buying shares with abandon. Those of us who have, do so knowing that right now, TSLA is pretty much the definition of what is not a widow-and-orphan stock. That said, TSLA shares doubled since its IPO, and if initial production and sales go as planned, it poses a more than considerable opportunity for investors. In meantime, I for one am looking forward to seeing more detailed data on who, where, and how many are interested in the Model S or X, aside from refundable reservation numbers. My HNWI thoughts might help compartmentalize the question, but by no means is it over.

Disclosure: I am long TSLA.