Why the Critics Are Wrong About Tesla Motors

Electric-car maker Tesla Motors (Nasdaq: TSLA  ) has no shortage of critics. Launched in 2003 and led by CEO Elon Musk, the company set out to create not only the best all-electric car ever built, but also the best performance vehicle on the planet. In 2008, the start-up released the Roadster and proved to the world that it could be done, albeit at a hefty price. Looking to the future, the EV company suspended production of the Roadster and recalibrated -- setting its sights on a new challenge: scale up production on increasingly affordable all-electric sedans. Once again, Tesla was met by enormous skepticism.

The short of it
Tesla kicked off 2012 as one of the most-shorted U.S. stocks in the market, with nearly 65% of its shares sold short. While that float has fallen to around 38% today, it's still a high percentage of so-called shorters to have betting against you. For comparison, just look at rival auto manufacturers General Motors (NYSE: GM  ) and Ford (NYSE: F  ) -- GM has a short-float of 8%, while Ford's is less than 4%. Data from the Russell 3000 Autos Index is equally dispiriting. The index -- which includes GM, Ford and Tesla -- is up just 1.5% this year, against an 8% gain in the Russell 3000 Index.

While other automakers have vast resources and in some cases, oil-backed subsidies, these are luxuries not afforded to a start-up EV company. When Mr. Musk came to Fool headquarters last year, I was far from sold on the idea of a newbie in the green-tech sector rising up to one day become the greatest automaker of the 21st century. Whether this becomes a reality is now largely determined by the success or failure of its new Tesla Model S sedan.

Underpromise
According to Tesla, the seven-passenger car packs superior performance to the tune of zero to 60 mph in 4.4 seconds. Tack on a top speed of 125 mph and other electric-vehicles feel like golf carts by comparison. For example, the 2012 all-electric Ford Focus tops out at a speed of 84 mph, fits only five passengers including the driver, and has a limited range of roughly 100 miles. Tesla's Model S, on the other hand, has a variety of ranges (depending on the battery package and pricing) and offers a base-range of at least 160 miles.

Further, Tesla's top shelf battery pack achieved 320 miles on a single charge according to the EPA two-cycle economy tests. As range improves so do the critics' attitudes toward EVs. And even as these tests get more difficult (EPA recently added three cycles), Tesla is light-years ahead of its closest competitors in terms of battery performance.  

Overdeliver
This month, Tesla briefly silenced naysayers when it announced plans for an early delivery of its new $49,900 all-electric car. Not long ago, critics questioned whether the company could get all of its powertrain components in a row for the slated July delivery date. We now know that production of its Model S is not only going as planned -- but is also ahead of schedule. Shares climbed 10% on this news, despite quarterly results coming in below the Street's estimates.

This is a huge vote of confidence for Musk's company at a time when it needs it most. True, the basic 40 kwh battery model is still expensive at $49,900 after federal tax credits. However, it's all part of Musk's master plan. In 2006, as the primary financier for Tesla, Musk penned the grand design -- a game plan that still holds true for the company today.  

  1. Build sports car
  2. Use that money to build an affordable car
  3. Use that money to build an even more affordable car (Model X)
  4. While doing above, also provide zero-emission electric generation options

So far, so great
Tesla has more than lived up to its goal of providing a zero-emission powertrain. In fact, ongoing supply deals with mature automakers Daimler and Toyota (NYSE: TM  ) are helping to bridge the gap to profitability. Toyota purchased battery packs and motors from Tesla for the new electric version of its popular RAV4 compact SUV. According to Bloomberg, Tesla this month announced a new powertrain agreement with Daimler this month for an all-electric Mercedes-Benz in 2014. "This program is expected to exceed in value the sum of all powertrain agreements signed in Tesla history," Musk said. And, I suspect the company will see similar supply deals once its Model S reaches drivers next month.

While the road to mainstream acceptance is paved with many potholes, Tesla continues to overdeliver on its promises, and I don't see why the delivery of Model S will be any different. However, it would be naive to think that the transition to EVs and sustainable energy could happen overnight. But I should point out that across the country, cities and states are promoting energy efficient solutions, bankrolling the deployment of electric cars and putting standards in place through organizations like the Electric Vehicles Standards Panel to help speed adoption.

Major U.S. companies are also showing their commitment to electric vehicles. General Electric (NYSE: GE  ) is finally making good on its 2010 promise to purchase an army of gas-free cars by 2015. The company is coughing up $1 billion for 25,000 EVs for its own fleet as part of a plan to accelerate the acceptance of electric-powered transportation. With rising oil prices and stricter government standards on fuel efficiency, there's never been a better time to end our addiction to petroleum-fueled transportation.

Why Tesla Motors will win
Tesla isn't trying to pick up where traditional automakers left off. This is a company that's writing the sequel to an internal combustion engine that ignited a multi-trillion-dollar industry. If Tesla is able to deliver on its promise of developing an affordable all-electric car at mass production, consumers and critics alike will come running. The company will deliver its lower-priced Model S beginning June 22 -- a milestone that I think will help critics better grasp Tesla's full potential. Tesla has the power to make a real difference in the world, but it isn't alone. Click here to discover the next big technology up-and-comer in this free video report from The Motley Fool: "The Future Is Made in America."

Fool contributor Tamara Rutter owns shares of Tesla. Follow her on Twitter, where she uses the handle: @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor, Tesla Motors, and General Motors; and creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (13) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 23, 2012, at 12:29 PM, financesq wrote:

    Lets look at the reasons that this whole fiasco has not imploded: 1) tons of investor money and 2) tons of taxpayer money. This idea is NOT VIABLE. Relying on the support of the US and many state govenrments to prop up your fuzzy unicorn pipe dreams is not a stable business plan - it is foolish (and not in the good fool way).

  • Report this Comment On May 23, 2012, at 12:47 PM, RyanW777 wrote:

    OR it is visionary. Visionary ideas are always called foolish fuzzy unicorn pipe dreams (or something similar) before they succeed. Then they're called visionary.

    A private company launching a spacecraft to berth with the ISS was a fuzzy unicorn pipe dream five years ago... guess what's circling the globe right now.

    If I were you I wouldn't bet against Elon Musk. He has a way of beating the odds.

    One small correction to the article. The 3rd step in Tesla's plan is to build an even more affordable car, but this is not Model X. The average Model X sold to the public will likely cost more than the average Model S due to the larger batter required and larger form factor. The even more affordable car Tesla will be releasing, hopefully soon, is the fabled "bluestar," about which we know nothing other than a target price point of under $30,000 and a launch in the next 4ish years.

  • Report this Comment On May 23, 2012, at 1:35 PM, spawn44 wrote:

    The headline says Why the Critics are Wrong about Tesla. Yet your talking points are all the reasons why the supporters are right. I suspect the number of people who are willing to put up $50,000 to go 0 to 60 in an electric vehicle is not a large number as are the number of people who will pay $50,000 to commute to and from work. If you want to take this vehicle on a trip. Good luck.

  • Report this Comment On May 23, 2012, at 8:17 PM, Cmorganson wrote:

    The author is spot on regarding Tesla's history of under promising and over delivering. This is the "reality" that investors see. This is an important factor when evaluating ANY investment because this is what separates reality from speculation. But in Tesla's case this is only one reason the stocks are a buy in my opinion.

    Lets face it, it's hard to bet against a guy (Elon Musk) with such a good track record and who is engaged in such relevant companies (i.e. EVs, solar power and space flight).

  • Report this Comment On May 24, 2012, at 2:31 AM, JohnnieBD wrote:

    You guys are unbelievable. Its one thing to "Root" for the concept and effort. Its entirely different to "Puff and Distort Reality" to prove your point. First, you need to understand that the Tesla run of Roadster production although sold did NOT generate any carry forward investment cash. It is well documented they LOST on average 50,000 per copy. Second, who in their right mind would compare the EV Focus with the coming Tesla sedan effort or any other upstream EV equivalent, especially in the arena of maximum performance. If you are going to do that where is the Nissan Leaf? And as for the "Low Cost" model that is on the far horizon it will run smack into a raft of competitive makes most of which will arrive on market way before another 4 years pass. Last if you want to wing it because an individual has had a great moment in his past and assume everything he touches in the future will succeed you need to look at the track record of a guy named Edison and how his feeble innovations in electric power generation and distribution failed miserably against NIKOLA TESLAS superior initiatives. So, do you get it...one or two field successes do not guarantee more automatically. I say this to you now. If the Tesla S can not sustain....sustain 10,000 units a year minimum it will be gone within 3 years. The 20,000 burst on intro is not "Proof" of a 10,000 plus annual market. Indeed if the "Leaf" doesn't jump into a US market 25,000 annual it will be gone within 3 years and so will Carlos Gohsn. Even then, that number is unprofitable it just saves them the embarassment of obvious failure.

  • Report this Comment On May 24, 2012, at 3:00 AM, F2JP wrote:

    It's funny how these negative comments rehash all the same old clichés without really saying anything relevant or accurate.

    (I heard, so it must be right so I'll repeat it as if I actually have some idea what I'm talking about, or if it is anywhere near accurate, or even relevant.)

    Most people who will spend more than $40,000 for a vehicle will also have access to other vehicles; so long trips are not a problem.

    99.5% of all passenger vehicle trips are less than 40 miles. Tesla’s Base Model S gets 160 miles then 250 miles, and the high end model gets 300+ miles per charge. (Also see above.)

    Tesla has over 10,000 reservations before delivering the first unit, and that is with no advertising.

    The author is correct in stating that Tesla is taking the automobile into the next phase of its evolution.

    The platform design, engineering, and production facility are all state of the art.

    Do any of you have any idea of all the negativity that was heaped on the ICE when it first came out? How about the television, the computer, and the microwave? Microwaves emit radiation, they're dangerous!!! Remember that one?

    They were all considered destined to fail by a lot of people, for the same type of cliché reasons that you are all too happy to blindly, repeat.

    Tesla’s time is near. When people can see, drive, and tell their friends about the Model S and the media has had the chance to test drive and report on it, the mindless negative background noise will finally be drowned out.

    Tesla has put the old guard manufacturers on notice. No doubt there will be some hard hitting ads meant to distract from the Model S release, so things are about to get interesting.

    I wonder why the Leaf, Volt, and other EV sales have been weak for the past few months.

    HMMM, could it be that many of the people interested in an EV are putting reservations in on the Model S,\Model X, or are waiting for it to launch so they can test drive one?????

    Let’s see whose stock runs up the highest in the next quarter.

  • Report this Comment On May 24, 2012, at 3:12 AM, F2JP wrote:

    JohnnieBD:

    Your reasoning shows absolutely no proof that Tesla will not succeed.

    You are right about the leaf, volt and others. Half hearted efforts get half noticed.

    The Model S is not a half hearted effort. It sets the bar higher for all passenger vehicles on many fronts.

    Have you seen it (with and without the body) sat in it? I have. This thing is for real!!!

  • Report this Comment On May 24, 2012, at 7:34 AM, Sudre wrote:

    The negative comments.... ROTFLMAO. I remember in the 90s when Apple was doomed and no one wanted a computer company doomed to fail. I bought a 1000 shares.

    Great things come at risk. The doomsday predictors will make average money along with all other investors average investors.

    There is a very large number of people that have been waiting since the late 90s for a highway capable BEV. All BEVs to date have been jokes. Less than 100 miles to the charge is tech from the 90s when people built their own BEVs in their garage with lead acid batteries which got 80 actual miles to the charge.

    The Leaf's HIGH price for a well under 100 miles per charge vehicle is a joke. That's why the public is not buying it in large numbers. The Volt is just another gas car with a battery thrown in not a BEV.

    If Tesla rolls out a fast charging network as promised then the car becomes a true all around road trip vehicle.

  • Report this Comment On May 24, 2012, at 10:05 AM, JohnnieBD wrote:

    GM built an EV vehicle in the 90's called the EV1. It was state of the art...it cost 3.5 BILLION to develop and build and after about 3,000 unit sales they were left sitting on approximately 300 units that no one would buy as they had "saturated" the market. After 3 years of no more sales they terminated the effort. Incidentally they were available with a higher level battery pack which would enable them to run abreast of a then current generation Corvette on the GM test track at 165MPH. For approximately 12 minutes at full speed. I got that from a GM track test driver first hand. It was about 5,000 extra for the better battery set up I believe were some kind of nicad variant. In addition a non lead higher level battery was available as an expensive option as far back as the early 1900's. So, do your homework, see that much is more hype than "NEW". A hundred years ago most major cities had dedicated downtown parking garages lined with recharge parking stalls. Their is a whole book written on them. The effort was massive to support and sustain EV's. Guess what happened. Who in their right mind is going cross country in a Tesla S at 55 MPH in order to achieve a questionable 220 or even more fantasized 300 mile range? Think about this...If you slow your Buick down to 55 MPH it will get 35 MPG...running a/c and all other accessories simultaneously. And it will "Recharge" in 5 minutes. Ladies and gentlemen...this is called reality.

  • Report this Comment On May 24, 2012, at 11:05 AM, brian2md wrote:

    JohnnieBD:

    GM didn't sell a single EV-1. They were all leased. That is why they were able to repo them all and destroy them. So, take your own advice and do your homework. Some editing would be nice, too.

  • Report this Comment On May 24, 2012, at 1:31 PM, JohnnieBD wrote:

    Yes they were leased. I wasn't going to bog down in the technicalities of that. The point is...there was almost no market acceptance of the offering. Had there been a market for the car it would have very quickly rolled into standard retail sales.

    They opted for initial leasing because of potential legal complications and in order to control the response if the car did not sell. You don't blame GM for killing the car when it was a money losing proposition.

  • Report this Comment On May 24, 2012, at 10:14 PM, Cmorganson wrote:

    Gentlemen, please stop comparing Tesla to:

    A) Failed models that are not Tesla's business model. 

    B) Products that target (or targeted) markets that are/were not Tesla's target market.

    C) Time periods not related to our decade. 

    This is 2012, not the "90s" and there is a global shift towards cleaner energy. Today, EVs are being produced in response to consumer demand.  The U.S. is lagging behind the global energy paradigm. This is not a fad, nor is the EV the only "answer" to lessening our dependance on oil or reducing emissions, nor is Tesla claiming to be the cure-all to everything.  What Tesla IS DOING is exactly what they have promised to do, which demonstrates a track record that is exciting for an investor.  

    In the Roadster, Tesla delivered an EV that outperforms all other EVs, AND outperforms most sports cars, AND can take a serious beating (proven technology), AND is sexy as hell.  That EV was not intended for the Leaf or the Volt consumer. 

    With the Model S, Tesla is delivering a sedan that will also outperform all other EVs (including an over 300 mile range), and that appeals to the higher end consumer (i.e. BMW, Lexus, etc.).  These consumers like, among other things, the superior performance of the Tesla, the reduced maintenance, the style, the zero gas, and oh ya...maybe the zero emissions thing too. 

    AND, they are delivering the Model S ahead of schedule.  

    Watch these stocks jump when Model S deliveries start. 

  • Report this Comment On May 25, 2012, at 2:21 AM, JohnnieBD wrote:

    Is that your "Opinion" CMorganson or a "Demand"?

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