The Most Misunderstood Stock on the Nasdaq

It's not uncommon for Mr. Market's wild mood swings to leave quality stocks battered and bruised. In general, the Nasdaq exchange tends to be more volatile than other indexes like the New York Stock Exchange. That's because a majority of the companies listed on the Nasdaq are highly speculative technology and Internet stocks. But one factor investors often forget is that risk is correlated with reward, and Nasdaq companies often boast the highest growth potential. 

Enter Tesla Motors (Nasdaq: TSLA  ) . Once the most shorted stock on the Nasdaq, it now seems the electric car upstart is the most misunderstood company on the block. The bears simply refuse to understand the disruptive strength of Tesla's business model. And who can blame them? Narrow infrastructure for electric vehicles in the U.S. and sky-high manufacturing costs are just a few of the hurdles Tesla faces on the road to profitability.

Then again, no one said flipping the auto industry on its head would be easy.

Risky business
There's no denying that the odds are stacked against Tesla. The Silicon Valley-based company is competing in an industry where economies of scale favor traditional automakers such as Ford (NYSE: F  ) and General Motors. Yet, Tesla has more than risen to the occasion. In fact, the company has already overcome many of the biggest threats to its success including near flawless execution of its Model S sedan.

The launch of its all-electric Tesla Model S car earlier this year marked an important milestone for the company. Tesla delivered the seven-passenger sedan a full month ahead of schedule to rave reviews. One such review by The Wall Street Journal went as far as to say, "The Model S is the most impressive feat of American industrial engineering since, well, a couple of months ago, when Mr. Musk's SpaceX successfully launched and recovered a spacecraft that rendezvoused with the international space station."

Tesla CEO, Elon Musk, has a proven track record of success. In 2002, eBay (Nasdaq: EBAY  ) scooped up PayPal (an electronic payments system co-founded by Musk) for a cool $1.5 billion. These days Musk is also known for transforming U.S. space travel, as his company SpaceX launched the first commercial spacecraft in history to reach the International Space Station.

And when it comes to Tesla, Musk has delivered so far on his promise to create not only the best all-electric vehicle ever built, but also the best performance sedan on earth. Yet, there remains considerable skepticism among investors, despite the company's impressive accomplishments to date.

Where the critics got it wrong
A majority of investors and bears continue to value Tesla using the same near-term benchmarks reserved for established auto companies. This is a mistake. Investors who aren't willing to take a long-term approach to valuing Tesla simply shouldn't own the stock. On the other hand, patient investors could see outsized gains if Musk follows through on his promise of making Tesla the greatest automaker of the 21st century.

Some of us remember a time when Apple (Nasdaq: AAPL  ) , now the world's most valuable company, was the underdog in a highly competitive industry. It took Apple more than three decades and an estimated $150 billion in iPhone sales to become the most valuable company in the world. Likewise, it should take Tesla years to reach its full potential. But don't underestimate the power of long-term investing. After all, $1,000 invested in Apple in 1997 when Steve Jobs took back control of the company would be worth more than $170,000 today.

Roadmap
For Tesla, a great deal of its future success depends on the speed of EV adoption. As the number of electric cars on the road grows, so should the infrastructure to support such vehicles. Last month, Tesla deployed its first six "Supercharger" stations in California. The company plans to roll out another 100 "Superchargers" on well-traveled highways across the United States by 2015. The nice thing about Tesla's "Supercharger" network is that in just 30 minutes you can add 150 miles of drive time to your car's battery.

Image source: Tesla Motors

And Tesla isn't the only company betting on a greener future. Major U.S. companies including General Electric (NYSE: GE  ) are also proving they're committed to the transition to EVs. GE is currently in the process of switching over its vehicle fleet to gas-free cars in what is said to be a $1 billion project. Additionally, new data from Pike Research suggests that 11.4 million electric vehicle charging stations will be in operation by 2020. These developments are all steps in the right direction, not only for Tesla, but for the broader EV market as well.

Gaining speed
I think the market is underestimating Tesla's potential in three key areas. First, is in terms of battery technology. Tesla's advanced battery cells, referred to as 18650 form factors, are much smaller and more cost effective compared to the batteries used in competing hybrid and electric cars. Secondly, the company's new "Supercharger" network is a game changer.

For one thing, Tesla's "Supercharger" stations will be free for drivers to use -- another smart way of fueling EV adoption. That's right, free. Need I say more? Lastly, the strength of Tesla's management team should not be underestimated. In addition to Musk, whom we discussed earlier, Tesla's team now includes George Blankenship. If the name sounds familiar it's likely because of his 10-year tenure as Apple's former retail guru. Today, Blankenship is VP of worldwide sales for Tesla, and the driving force behind the company's retail stores in malls around the country. Throw in some of the industry's most talented engineers and voila, a recipe for successful execution. 

Yours for the taking
There's something to say about a company that sparks demand where there previously was none. From the company's more affordable battery system to its high performance electric cars, Tesla is covering all the disruptive bases. With institutional investors still on the sidelines, shares of Tesla represent an opportunity for patient investors to grab a piece of a potential multi-bagger before it peaks.

However, those with a shorter time horizon may be better suited with a proven performer such as Apple. The Fool's new research report on Apple covers every angle of the tech titan's investment thesis, and it even includes timely updates on the stock -- helping you decide when to buy, sell or hold shares. Click here to get your copy of the report now, while it's still available.

Foolish contributor, Tamara Rutter owns shares of Apple and Tesla Motors. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Apple, Tesla Motors, and Ford Motor. Motley Fool newsletter services have recommended buying shares of eBay, Apple, Ford Motor, and Tesla Motors. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. 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.


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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 October 09, 2012, at 7:23 PM, jeffkaylor wrote:

    Tesla is a turkey because the car itself is not a viable concept.

  • Report this Comment On October 10, 2012, at 6:54 AM, TruePp wrote:

    Yeah jeffkaylor, Model S beats competing bimmer M5 only in performance, price and practicality departments.

    This explains why M5 annual production rate is around 4 000, while Model S is on it way to 20 000 per year sales/production rates... By the way, Tesla Motors already accumulated 13 000+ deposits for Model S and 2 000 Model X ones... Each deposit is at least $5 000.

    Not a viable concept.

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