Truth Or Myth: Most People Still Don't Get Tesla
about:TSLA includes:AMZN
Ever since electric-car pioneer Tesla Motors (TSLA) emerged with a victorious Q1, reporting its first profitable quarter on May 8, Tesla longs and shorts have fiercely debated notions ranging from the Model S to the TSLA stock. As most people do not have the luxury of experiencing the Model S or spending the time needed for deep analysis, they are easy victims of the popular myths about Tesla. In this article I explore some of the most common truths and myths about Tesla and render the verdict.
I encourage you to participate in the debate, and even overthrow my verdict. Your feedback will be my inspiration for a possible sequel to this article.
Truth or Myth #1: A Tesla is a gorgeous, high-tech, sexy, rich person's toy purchased mainly to impress one's friends.
Granted, with a $70K base price, the Model S is out of reach for most. However, that doesn't mean the average Joe can't get it. To that point, I am a living example. I am scheduled to pick up my Model S on June 12th at the Fremont factory, and enjoy a long-awaited factory tour as well. I am excited to see the fascinating robot arms assemble the model S. If you are less fortunate, you can watch this video tour from National Geographic.
What's my current vehicle? A mere $25K Honda CR-V. What drew me to Tesla in the first place? One of my work colleagues, a typical Silicon valley IT worker was buying a Model S 6 months ago! I am not a car person by any means, nor am I a tree huger. I would be hesitant to spend even $50K on something like a BMW or other luxury car. But I feel great spending $92K on my Tesla, which leads to the next point.
Verdict: Myth
Disclosure: I have made some investment in TSLA which helps justify my purchase of a Model S. However, I made my $5K deposit long before that.
Truth or Myth #2: Spending $50K+ on a BMW, Audi, Mercedes, Lexus and Jaguar makes you look foolish, or worse, irresponsible.
Most people, investment analysts included, tend to evaluate whether an electric or plug-in vehicle is viable by the predicted number of years it takes to recoup the premium cost one pays for such a vehicle. This logic works perfectly well for the likes of Toyota Prius, Nissan Leaf and Chevy Volt, all of which suffer noticeable performance compromises. But not only is the Tesla Model S is a "no-compromise", kid-friendly family car, it raises the performance metric to a level that competes with the world's best sport sedans costing more than $200K. Case in point: the Aston Martin Rapide S, one of the best sporty sedans on the market, carries a price tag of $202K. The Model S beats it in every category:
Tesla Model S vs. Rapide S (Thank you Randy Carslon for the nice comparison)
Tesla Model S
(click to enlarge)
Aston Martin Rapide S
(click to enlarge)
Go ahead and get excited driving home your brand new BMW, Audi, Mercedes, Lexus or Jaguar, but be ready to answer the inevitable question from your family and friends: Why?. Only the following replies could be considered legitimate:
· I have to have AWD, or I can't live without a convertible, or I need a SUV.
· I can't wait 4-6 weeks. But I can spend the whole day haggling with the dealers to get my price.
· I have range anxiety. Go to point #4.
Should you offer any other reason, you simply look foolish, maybe downright irresponsible, not just towards the environment, but in terms of your own hard-earned money.
Verdict: Truth
P.S., if you are not convinced, listen to the market and read Tesla Model S is now the best-selling luxury car and Tesla Model S outsells Volt, Leaf.
If you are still not convinced, continue to the next point.
Truth or Myth #3: The true cost of the Model S is lower than that of a $50K BMW, Audi, Mercedes, Lexus or Jaguar.
A lot of math has been done to derive the true cost of the Model S. I will not go as far as others have and declare that the $70K Model S only costs a mere $15,625 after factoring all the rebates and savings. I would, however, confidently state that the true cost of the Model S is indeed lower than $50,000 after these savings:
· Federal tax rebate of $7,500
· Gasoline cost savings of $10,000 over 5 years
· Service and maintenance cost savings of $2,500 over 5 years
I intentionally leave out the assumptions about how the cost savings are calculated. But no matter how you slice it, you will save more than what I list. I also omitted the following savings that apply for most owners:
· State tax rebate of $2,500 or more
· No sales tax in certain states
· HOV lane privileges
· A quiet ride and no more smell of fumes
Even these do not do the Tesla full justice. Most owners call "Priceless" the improvement in the quality of life that comes with owning the Model S. All owners I know are simply happier and enjoy life more.
Personally, I value the HOV lane privileges more than anything. Saving 10 minutes out of my 30 minutes commute means I can live longer effectively, not to mention I would actually enjoy the whole commute.
Verdict: Truth
Truth or Myth #4: Range anxiety
Enough already, about range anxiety, the most mysterious Model S misconception. While with other EV cars ranging in the neighborhood of 100 miles, it's a valid concern, the Model S has a range of more than twice that, more than enough for 98% of daily commuters. With the dramatic expansion of the Supercharger network, Tesla Model S drivers can now travel long distances within North America, for free, forever.
Either you get it, or you don't. Once you get in a Model S, range anxiety is a thing of past, one that only small EVs like the Nissan Leaf need to worry about.
Verdict: Myth
Truth or Myth #5: The EV is unproven technology; the battery will degrade significantly after a maximum of 1,000 charges.
I can't debate whether Tesla's car is proven or not; neither the Roadster nor the Model S has been on the road for more than 5 years. However one die-hard Roadster owner has abused the car to an outrageous degree:
"A well-known Roadster driver, Hansjörg von Gemmingen, has driven his Roadster for more than 160,000 miles in 4 years and is at a battery depreciation rate of 70%."
The Model S, with a larger, 85kwH battery, is covered for eight years and unlimited miles. So go ahead and drive as crazily as you can, abusing the battery as much as possible. As long as you don't take a blowtorch to it, blow it up or set it on fire, Tesla's no-fault battery warranty covers it all.
Verdict: Half myth, and the jury is out for the other half.
Truth or Myth #6: Tesla makes expensive electric vehicles affordable only to the wealthiest 1%, while EVs account for less than 1% of car sales. The $11 billion market cap is a bubble.
The Tesla Model S is the Motor Trend Car of the Year, and according to Consumer Reports, the best car since 2007, not because it is an electric vehicle, but because it is simply the best car. Yet its electric DNA gives the Model S its rigid body structure and remarkable low center of gravity, which contribute to the car's structural stability and exhilarating performance. The Model S has strong appeal for anyone who desires the best car, though it is limited by its price tag. However, as Tesla founder Elon Musk put it in the secret master plan, Tesla is marching on to build an even more affordable car, on the following plan:
1. Build a sports car.
2. Use the money earned to build an affordable car.
3. Use that money earned to build an even more affordable car.
The plan for step 3 is a $40,000, 200-mile electric car due by 2017. Since up to this point Tesla has brilliantly executed according to plan, there is no reason to doubt they won't complete step 3.
Let's move on to market cap. It is gross ignorance for anyone to compare Tesla's P/E values with those of Ford or GM and declare TSLA overvalued. Make no mistake. Tesla is a technology company, not a traditional automaker. Even more, Tesla is not just a technology company; it is the culmination of the most powerful business model that exists: one that appeals to the broad market while enjoying tremendous technological and business model competitive advantage. It has an whole ecosystem supporting it with Tesla seated at the top of the pyramid. I cannot think of any business as brilliant, save Amazon (AMZN), and yet I think TSLA deserves a larger valuation multiple than AMZN, considering the future potential and the extend of disruption. As of June 3, 2013, Tesla is trading at $92.6 with a valuation of $10.6 billion. That gives a forward earnings multiple of 89, comparable to Amazon's forward earnings multiple of 83.
Verdict: Myth
Truth or Myth #7: Tesla's 21,000 car sales target for this year is doubtful. The 25% gross margin is untenable without ZEV credit revenue.
Not only will Tesla sell 21,000 cars this year, it will significantly beat this number. The 21,000 cars is just a number Elon tossed out to tease, a slight improvement over the previous estimate of 20,000. It is an open secret that the Model S is much more attractive in Europe than in the US because the price of gasoline is at least twice as high there. Rising European sales and strong demand in the US will push the sales this year to the 25,000 range.
As to the prediction of 25% gross margin by year-end, a number of articles by the Tesla bears have developed a theory on why Tesla is not profitable without the ZEV credit. Elon has repeatedly stated Tesla will reach 25% gross margins with zero dollars of ZEV credit revenue by year-end. If you choose to doubt him, then you haven't learned the lesson of the recent short squeeze.
Verdict: Myth
Truth or Myth #8: The big automakers, Toyota, GM and Ford, will launch their own EV products and crush Tesla. Tesla has no intellectual property or competitive advantage that will enable it to stay ahead.
No one has dissected this myth more eloquently than Julian Cox. I recommend you read the most brilliant, powerful and in-depth analysis of Tesla's competitive advantage.
Verdict: Myth
Truth or Myth #9: Tesla is the next Apple (AAPL); Elon Musk is the next Steve Jobs.
I will simply render the verdict here and let the readers debate it.
Verdict: Truth
Actually I want to offer an even stronger argument. I intentionally left out the reasons behind the argument because I want to hear from you.
Tesla is more than Apple. Tesla is Apple on the outside, but it's Google (GOOG) at its core; Elon Musk is more than Steve Jobs, because he wants to take mankind to Mars. (I hope you are not laughing.)
Truth or Myth #10: Forget about Great America; just take your kids for a Tesla drive.
I once sat in Model S of my good friend David. David is an amateur race car driver who drives the Model S with a mania, fully demonstrating the rocket launching and racing capability of the Model S. For me, it is more satisfying than riding the roller coaster in Great America, because the instant accelerations and stunning turns are accomplished in silence, giving the feeling that you're riding a spaceship rather than a man-made vehicle. Kids seem to agree, they just love Tesla. Even Kindergarteners are having fun with Tesla!
Verdict: Truth
Truth or Myth #11: Gallons of light
Here is an unofficial video commercial for Model S by a Tesla fan. It goes beyond the mundane notion of gasoline cost savings and finds in the Model S new heights of nobility. I was impressed by the professional quality achieved by an ordinary fan - without any backing from Tesla - and the sublime ideology behind it.
On this one I'll let you call the verdict once you watch it and check out its background.
Summary
While some of the evidence could be considered anecdotal, it is my intention to offer a fresh account of Tesla that repudiates the myths and clichés. There are also a few irrationally exuberant or audacious arguments. I did this intentionally, to provoke your curious mind. The commonly-perceived wisdom is "Yeah, the car is good, but the stock is ahead of itself. Wait till Tesla comes out with an affordable model; only then will the stock interest me". By then it will be too late, my friends. When the $40,000, 200-mile electric car hits the street in 2017, are you naïve enough to think that the stock will still be at 2 digits?
As of June 3, 2013, TSLA is trading in the $92-$96 range with a market cap of $11 billion. In contrast to most people, I assert that this is a fully justifiable valuation, and perhaps offers one of the very few remaining windows of opportunity to go long on TSLA.
The prevailing theory is that when any stock rises more than 200% in a month, it is due for significant pull back. However, it is in this magnificent May that Tesla solved its two most apocalyptic and thorny issues: one for the company and one for the car, and that completely changes Tesla's valuation.
The company's apocalyptic issue is its financial outlook. Not only Tesla is now profitable, it has successfully raised more than $1 billion dollars. With more than $760 million left after paying off the DOE loan, Tesla has a lot more capital in its coffers. TSLA has been suppressed over the years due to the profitability issue and the stigma of the DOE loan. It is only reasonable to conclude that the suppression effect will rebound now that the situation has completed a 180° turnaround, one whose impact the market has not fully digested.
The thorny issue around the Model S is the charging infrastructure. But now the dramatically expanded of Supercharger network, which I correctly predicted, Tesla effectively removes the only Model S drawback.
If I have got you thinking of going long with TSLA, even to the slightest extent, this article has succeeded. In subsequent pieces, I will offer a number of trading techniques that let you go long with reduced risk. Until then I hope the windows remain open for anyone brave enough to jump in.
Another closing thought. I just walked out of the Tesla's 2013 annual shareholder meeting in Mountain View, California with some satisfying and astonishing answers to my questions. And Elon Musk iced the cake by saying:
(click to enlarge)
Now that is the company you want your money to invest in.
Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
- - - Updated - - -
This article was intent to be published on SeekingAlpha. However the review process has caused some delay so I decided to publish here. I want to hear your debates, though there may not be as many naysayers showing up here as I'd like to see.
I took out "Aston Martin or Maserati" from the line up of luxury brands in #2.
Pick up date moved up to June 12th, to my pleasant surprise.
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