Optimists Vs. Pessimists

| About: Tesla, Inc. (TSLA)
This article is now exclusive for PRO subscribers.

By JinBae Kim

I recently wrote an article supporting Tesla Motors (NASDAQ:TSLA). The amount of feedback I got was immense. Investors were going at it within the first few hours, with intelligent comments going back and forth. I apologize I did not partake in the discourse, but I was curious about everyone else's thoughts.

From the 104 comments I have received, I can confidently say that the market is divided. Investors have extreme opinions on Tesla Motors. With the same given information, two investors will interpret it completely differently. As I mentioned in my previous article, the market's ambivalence is inevitable in this highly innovative market that attempts to disrupt the existing automotive industry. This is very similar to the way the market reacted to Apple (NASDAQ:AAPL).

Therefore I have segmented the investors into two different groups: optimists and pessimists. Optimists see a huge upside potential. Optimists believe in the core product of Tesla and see a real value in it. Pessimists of Tesla have a difficult time embracing this technology. Some believe that the energy density and high maintenance of lithium-ion batteries will limit the progress of electric vehicles. Some don't trust CEO Elon Musk and the company to meet the delivery schedules set for Model S. Some simply advocate the merits of a traditional ICE vehicle.

The balance between optimists and pessimists is going to shape Tesla's share prices until the actual delivery of Model S. Pessimists are going to continue to short this stock and optimists are going to continue to long it. And once investors establish their positions, they are going to do everything they can to convey their message to the market and push the prices in the favorable direction.

Ultimately, all this speculation will end once the Model S comes out in a month. Only time will tell who the winner of this ongoing debate is. But until then, I will make my own judgment and speculations.

Being an optimist myself, I would like to address some concerns in the discussion of electric vehicles and Tesla.

Product Issue: Lithium-Ion Batteries

Tesla's electric vehicles employ lithium-ion batteries, which have energy density limitations from an engineering perspective. Its energy density limits the range of the vehicle. Electric vehicles have been labeled with "range anxiety." Most electric vehicles have ranges between 100-200 miles, while most ICE vehicles have ranges around 300 miles.

Model S, on the other hand, has an estimated range of 300 miles, which should be fine for any kind of driver. Most ICE vehicles do not even get to 400 miles.

However, according to Tesla's 12/31/11 10k, EPA's new fuel economy requirements could reduce these estimated ranges up to 30 percent. The capability of this technology has not changed. The estimated range of 85kWh equipped Model S is still 300 miles, while traveling at a steady speed of 55 miles per hour. But EPA believes that traveling at a steady speed of 55 miles per hour is not the most accurate estimation of real-life conditions.

Even with EPA's requirements, the Model S hits 210 miles, which should not be a problem. I am not saying that every driver in the U.S. drives less than 35 miles, but I am saying that 210 miles should not be an issue. The range of Model S is a big improvement from the range of the Roadster, and we can expect more developments in the range of future electric vehicles.

Battery Energy Density

Source: The Technium

As we can see, the energy density of Lithiuim Ion has increased at a steady rate since 1985. Lithium Ion batteries will continue to be improved.

Additionally, some investors have issues with battery maintenance. Charging batteries should not be an issue. Charging your electric vehicle before going to bed will become habitual, just like charging cell phones or iPads. All electronic technologies require some management. In the long-run, the battery pack also deteriorates and the customer must endure maintenance fees. After 7 years, the battery pack is only retain 60-65% of its original range. However, Tesla has said it will warranty the battery pack for 7 to 10 years.


I understand the irrelevance of federal tax rebates in the discussion of electric vehicles. Tax rebates are marginal to the total costs of purchasing and maintaining electric vehicles. These incentives will not be available forever.

That said, I still see more people overestimating rather than underestimating costs. First of all, annual fuel cost savings will accumulate. Assuming that you drive 12,000 miles a year with rates of $.12 per kilowatt hour, you will pay about $389 per year to charge your electric vehicle. Assuming you would have driven 12,000 miles with a 30 miles per gallon vehicle with rates of $3 per gallon, you will save about $1,200 in gas. This is $811 or %68 in savings of fueling costs. Moreover, an electric vehicle has a more streamlined system, which can save the average driver around 46% in annual maintenance costs, according to a federal government study.

We also have to realize that the costs of batteries and maintenance will decrease in time. For instance, supporting services will be available in the future to facilitate the use of electric vehicles. As charging stations gain economies of scale, and other services (GE looking into Battery Leasing for electric vehicles) become available, cost of ownership will decrease.

Profitability Issue

As of today, Tesla has never had a positive quarter of earnings and does't expect 2012 to be positive either. But how is this an issue? Tesla is still a start-up company and will need some time before it makes a profit. The more important indicator is sales, and Tesla had a great sales year in 2011. The Model S is only going to make it better.

Despite all the concerns on the technology, look at the number of cumulative Model S Reservations.

According to Tesla's website, at the end of 2011, the company had over 8,000 cars reserved that required a deposit of $40,000 for the top performance vehicle, and $5,000 for the other Model S vehicles. At the end of the day, there are customers that want to purchase the Model S.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.