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Cult Stock TSLA And The EV Mass-Market Going Forward

|Includes: GM, Tesla, Inc. (TSLA)

This is my second entry about TSLA (ahead of earnings) and EV cars potentially entering the mass market. The first one was about "cult stocks" in general (one of them being TSLA) , this one is more about the EV market evolution.

To quote CEO Elon Musk on his well-known long-term strategy for TSLA:

"So, in short, the master plan is:

  • Build sports car
  • Use that money to build an affordable car
  • Use that money to build an even more affordable car
  • While doing above, also provide zero emission electric power generation options"

( Source: http://www.teslamotors.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me )

TSLA's current (in my opinion over-optimistic) valuation is based on the third bullet point mentioned above: A future Gen III car from TSLA costing about 30-40k USD (expected in 2017 globally). Because as of mid-2013 TSLA is still a very small car manufacturer:

(Source: blogs.wsj.com/corporate-intelligence/201... )

Currently TSLA is at stage two of the quoted plan, namely selling an "affordable" car (that's a stretch for many customer segments at close to 90100k USD with all options added, but not discussed further here):

The Model S (limo for up to 7 people, including 5 adults) and the Model X (SUV, debuts in late 2014).

Not much is known about the Gen III Car, but there are already competitors in the EV and PHEV car space in the price range. It makes sense to look at them closely. Why? Only if the TSLA Gen III car is a resounding success and sells 150-250k units or above per year does a high (triple-digit) valuation of TSLA stock make sense.

The Gen III car (I assume no investor has ever seen it live without insider knowledge) will have to be on par or better than the three competitor's car models below 3-4 years into the future.

The crucial question to ask:

Will the TSLA Gen III be better rated by consumers/auto press and have higher margins than...

  1. GM Volt +4 years of refinements
  2. Nissan Leaf +4 years of refinements
  3. BMW i3 +4 years of refinements ?

(Not to mention likely additional new entrants between now and 2017..)

Also keep in mind the three brands mentioned above will have built up nice economies of scale in EVs until 2020. Larger car companies can also accept EV unit sales with low margins for some time, TSLA doesn't have this luxury with a small model range (it is assumed GM was losing money or just broke even on the Volt until recently, although Bob Lutz denied this in an interview recently).

Sales of the Leaf and Volt are promising and keep rising compared to 2011-2012, many companies are also cutting EV /PHEV prices. This should further increase the competition and sales in 2014 and onwards:

In January, Nissan Motor Co (7201.T) cut the price of its Leaf EV by more than $6,000, and in May Honda Motor Co (7267.T)(HMC.N) slashed the lease price of its electric-powered Fit subcompact car by one-third. In July, Ford Motor Co (F.N) reduced the price of its 2014 electric Focus by 10 percent.

GM had cut the price of the 2013 model Volt by $5,000 to help boost demand. In late May it launched the Chevy Spark electric vehicle with a lower-than-expected starting price of $27,495 and is offering discounted leases on both cars.

The Volt price cut is another step in GM's effort to seize the mantle of "greenest automaker in the world" from Toyota Motor Corp (7203.T)(TOYOF.PK), which makes the popular Prius hybrid car. Toyota also sells a plug-in version of the Prius.

(Source: www.reuters.com/article/2013/08/06/us-au... )

Therefore I do not buy the argument many TSLA longs and optimists have made about TSLA's headstart in EVs and battery technology. One example:

"TSLA has completely revolutionized the playing field for electric car companies. Nissan (OTCPK:NSANY), GM (NYSE:GM) and BMW all need to be very afraid, because TSLA is years ahead."

( Source: seekingalpha.com/article/1607412-tesla-m... )

I don't think these two bold statements are true - except for the current luxury/high-end EV segment with the Model X and possibly the Model X in the SUV space.

It should also be noted the battery space is full of contestants with high R&D in li-ion tech and battery management systems - not to mention start-ups such as Envia Systems, Sion Power and others.

In my view, one should only compare cars within the same price range/market segments:

The BMW i3 and other EV /PHEV cars mentioned above should be compared to the (future) Model Gen III car from TSLA, the current TSLA Model S on the other hand should be compared to a (hypothetical future) i5 or i7 from BMW, not the i3.

One could even turn the argument around and say GM, Nissan and BMW have a 4-year headstart in the lower-end/mass-market EV and PHEV price segment until the Gen III is available from TSLA.

My assumption: I think the competition - I only listed three popular models above as examples - will be on par with TSLA in 2016-2017 based on test reports and likely model updates of the BMW i3, Nissan Leaf and the GM Volt in the meantime. The GM Volt, for example, is expected to be completely overhauled for 2015-2016 and may likely get another price cut.

It would also be a mistake to assume TSLA can carry over all the advantages the Model S enjoys (hence the price tag) to the Gen III car - or that competitors couldn't match these features or the vehicle range (rumored to be 150-200 miles) in the mass market by 2017.

( For additional reasons why TSLA is over-valued, please see my earlier comments on TSLA in SA articles. I won't repeat all the arguments here.)

More generally, I expect the following long-term trends in personal transportation:

- PHEVs (and slowly more pure EVs) to be sold from all brands within 5-10 years on all model lines. Growing policy support for better public EV charging infrastructure, eg. see the recent Netherlands example for 200 EV stations: http://engt.co/15NZvvB

- Urbanization. Less young people in urban areas wanting to own a car or even aspire to buy their first car (instead just leasing a car on demand). Public transport is more efficient in mega-cities. BMW also put an emphasis on this when it launched the i3 EV:

Mostly, this is a car for people living in megacities, not on farms, and BMW says when the world population hits 8 billion in a decade, half will live in cities. So the car is crafted for crowded cities. The turning circle is 32 feet. Some models can help you park. Assuming there's no tall coffee cup sticking out of the center console, the Slide Through Experience (BMW's term) lets the driver slide over and exit away from traffic.

( Source: www.extremetech.com/extreme/162582-bmw-i... )

- Less cars sold worldwide in total once Asia has caught up and people just "replace" their aging cars (less net new car buyers over time).

PS: I still value TSLA at 50-85$, basically half at what the stock is trading at today. Prior to that, I was long TSLA when it was trading below $30 and sold out after it had doubled.

Very short term, I would at least wait until earnings on August 7, 2013. The smoke should then clear on 2013-2014 sales and especially international sales outlook - before adding to a short/long position in TSLA. I am looking to add to my short in case TSLA rises above 150-175 $.

Disclosure: I am short TSLA.