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Randy Carlson
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I am an engineer and long time technical consultant specializing in control and instrumentation systems for medical, industrial, vehicle and aerospace companies. The technical, cultural, market, regulatory and other factors that separate successful products and companies from their peers has... More
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  • Tesla, The 2015 Upside

    There is a great deal more to Tesla (NASDAQ:TSLA) than investors seem to realize, understand and appreciate. Investors, particularly on the short side, who ignore the range of disruption in which Tesla is poised to participate could find themselves unpleasantly surprised in the coming year.


    The market is largely missing what Tesla is doing with, or trying to do with, electric cars - and in this regard I'm speaking of the business, not the environmental aspect.

    One of the most powerful things a startup can do is orchestrate and then take economic advantage of an industry disruption. What Tesla is doing is applying the technologies of lithium-ion batteries and advanced power electronics to automobiles, attempting to disrupt the way cars, SUVs, and other vehicles are powered. This isn't a fundamentally new idea - powering cars with electricity - but in the past, batteries were too heavy and motors too large to make the electric solution competitive.

    Forty years ago, colleagues of mine built a prototype vehicle for a major carmaker that used the then 'revolutionary' AGM (Absorbed Glass Mat), lead-acid batteries with much higher power density than conventional lead-acid batteries. Using these batteries, a large, electric, luxury sedan with powerful motors would 'smoke the tires' while traveling 70 MPH. Of course, with lead-acid batteries, this test-bed had very short range. Even back in the 1970s however, we appreciated that with batteries good enough and with affordable power electronics, a higher performing, lower cost (to say nothing of cleaner) alternative to ICE cars would be possible.

    Eventually, GM applied power electronics and induction motor technology (that's where the copper-rotor induction motor, like Tesla uses, was developed) and AGM lead-acid and later nickel-cadmium batteries to build the EV-1. Tesla's original Roadster is basically a 'hot-rodded' EV-1 with lithium-ion batteries. The P85D shows that performance, limited only by the tires, can be achieved by an electric, luxury sedan with practical range.

    This brings us to disruption. A small, new-entrant with a disruptive technology, attacking a mature market must enter somewhere. A small entrant can't take on every part of the market at once because 1) they lack the resources and 2) new, disruptive technology is initially immature and advantage will only be seen in particular niches until the new technology improves and costs are run down the 'learning curve'. The new entrant should, of course choose an entry point where their disruptive technology, in it's initial form, offers advantage and is, overall, cost competitive against the incumbent technology.

    Tesla has chosen to enter the market in the high-end, high performance sedan segment. Buyers of such cars pay a premium for performance and 'novelty', features which Model S has provided very nicely. Tesla has taken advantage of both public interest and Government policy to sell the 'greenness' of their cars, and to reap direct and indirect subsidies related to policy. ( If you don't like the policy, vote for someone else next election, but don't blame Tesla for something that is not of their creation...)

    The question of whether an electric disruption of the car business is underway should by now be beyond doubt. Hybrids, PHEVs and pure BEVs are either available from or in the pipeline at most major carmakers. For Tesla investors, the issue is no longer whether Tesla will disrupt, but to what degree Tesla and their shareholders will benefit. While it is very unlikely Tesla will displace GM, Toyota or VW as hegemon of the auto industry, they are pursuing several parallel strategies, each of which can bring their shareholders enormous profit going forward.

    Tesla has, as I have previously suggested, a strategic advantage in being better able to attack the high-end, high-performance, high-margin cars in market segments they choose to enter. This will allow Tesla to reap profits disproportionately larger than the volume of cars they sell.

    Tesla is already moving to vertical integration and building of their own battery cells. This will keep, more to the overall value-add within the company compared to automakers who go to suppliers for their cells, and further benefit shareholders.

    The naysayer who focuses on a carefully gleaned manufacturing hiccup or adverse bodyshop repair experience is blinding themselves and distracting the market from Tesla's continuing progress and from auto industry electric power disruption. The coming year will see Tesla continuing to sell cars, expand markets, grow their industry footprint and loyal customer base. The big picture is what counts.

    Fast Charging - Another Disruptive Tesla Business

    Tesla is far ahead in deployment of high power, fast chargers to enable practical long-distance travel by BEVs. Because Tesla builds both the cars and the chargers, and because their cars are designed for high performance (high power), Tesla cars are better suited to rapid charging and achieve better road-trip times than other 'fast chargeable' cars like the LEAF. Tesla has offered their package of car / battery / recharging technology to other manufacturers who wish to participate in the SuperCharger network and give their customers similarly good road-trip performance. This will be a huge win for Tesla shareholders when other carmakers come aboard. Joining Tesla's SuperCharger network is by far the quickest, lowest cost, lowest risk path by which a manufacturer can offer their customers 'road trip capable' electric cars. When other carmakers begin making high performance, long-range electric cars, joining the SuperCharger network will be hard for them to resist.

    Investors should appreciate that any long-range, high performance BEV (not just Model S / X) competes directly against high-end ICE products. If Tesla's P85D blows away Mercedes AMG63 (which it does), then a Tesla competitor from Mercedes will also blow away the AMG car. Will Mercedes put that car in the same showroom as the AMG? More likely would be for companies like Mercedes, VW, BMW to offer Tesla direct competitors through 'specialty partners' or as a separate 'niche brand' with separated distribution from their high-end ICE product. But a performance, long-range BEV product from Maybach, Aston Martin, Lamborgini, Bentley, Rolls, etc. would still need a road-trip recharging solution to be relevant, and a second-best solution would hardly cut it for a high-end product. This is one path by which Tesla SuperChargers are likely to get their foothold with the broader market. When this happens, look out. Once Tesla gains SuperCharger participation from other manufacturers, they will be on the path to dominate road-trip recharging, and the economic benefit dominance that brings.

    Grid Storage

    Tesla is actively leveraging their vertical integration in batteries, their expertise in power electronics and their scale and cost advantage from volume automotive production to enter the grid-connected battery storage market. Tesla has industrial scale grid storage modules integrating batteries, electronics and environmental controls. These modules are already being used in behind-the-meter applications.

    Tesla has a tremendous advantage, especially in smaller, behind-the-meter applications with lower costs, small size systems based on automotive technology, and their ability to scale. Grid storage is set to be as large a market as cars, world wide, and Tesla is positioned to be a significant player. This is another potential major win for shareholders.

    Any one to these Tesla opportunities - cars, SuperChargers, grid storage - alone, even discounted for risk and time, justify the current market cap. Should the market catch on to the fact that Tesla is more than a car company, the stock could easily triple and see $600 - 700 in the coming year. Just a little hype, a little enthusiasm, a little market exuberance. a wee-bitty short squeeze and we could see TSLA at $1,000. For Tesla longs, that would be a very Happy New Year.

    Disclosure: The author is long TSLA.

    Tags: TSLA
    Dec 31 4:07 PM | Link | Comment!
  • Tesla: Unplug In May And Go Away?

    Electric car maker Tesla Motors (NASDAQ:TSLA) has been on a tear since last fall. What was $28 stock at the end of September just hit $50. Wow what a ride! Tesla won Car of the Year, Tesla is selling cars, Tesla is making money and the market has been good to Tesla shareholders. But there is something Tesla investors should pay attention to.

    Tesla has attracted market interest far beyond what a company of this size usually sees. Investors are highly polarized. Some love this company, its products and its CEO. Others despise the company, hate the product, loath the CEO and are about to rebel against their Government for allowing Tesla to exist. Oh, did I mention that a really big chunk of Tesla shares are short?

    Tesla CEO Elon Musk has promised several "very exciting" announcements. Deliveries of Model S cars to European customers are soon to begin. SuperChargers will be rolling out across America. Frunk liner production and by inference Model S production is going to 30,000+ units a year starting in late Q3. The really big news for Tesla shares in the near term may however be much more pedestrian: Summer is almost here.

    The old investment adage, "Sell in May and go away" could have more impact on Tesla shares than any big announcement or even any big progress that Tesla may make between May and October. Tesla's share price is highly volatile, driven by market sentiment and inflamed by the massive short interest. If Tesla investors really do take the summer off, interest in the stock will wane and shares could languish - though Tesla shorts might avail themselves and unwind some positions.

    Investors departing the market over the summer has a sound, empirical basis. Since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. Why stay in the pool when everyone else is out in the sun? As it turns out, Tesla's share price behaves a lot like the rest of the market.

    (click to enlarge)TSLA price history

    Going back as far as the IPO, Tesla shares have performed less well from May 1 through October 15 than during other times of the year.

    Tesla is poised to do interesting and important things this summer. Things that should strengthen Tesla's competitive position, grow sales, and innovate new solutions to electric mobility. But none of this will drive the share price if Tesla's investors are unplugged.

    Disclosure: I am 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.

    Tags: TSLA
    Apr 22 3:15 PM | Link | 2 Comments
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