It's been a long time since the auto industry went through a real transformation. Ford's (NYSE: F ) mass production method of manufacturing changed the industry in the early 1900s, but since then most of the changes have been incremental in nature.
Today, the electric vehicle has a chance to upend the industry and Tesla Motors (Nasdaq: TSLA ) is leading the way. But upending an industry like this is risky and Tesla is facing an uphill battle. That's why I've been reluctant to throw any money into the stock. But now I've finally gained enough confidence in the industry and Tesla's product to pull the trigger and buy a few shares.
Early mover advantage
Tesla has a first mover advantage in this fledgling industry. It is also the only (successful) company to be solely focused on EVs. This gives the company time to prove its ability to make quality vehicles before the industry hits full stride.
The advantage of the first mover shouldn't be underestimated, as Toyota (NYSE: TM ) has shown in hybrids. Not only does it give engineers the time to perfect EV technology it builds an early relationship with customers.
Tesla's battery allows it to offer 300 miles of range, something other EV manufacturers have yet to offer. If EVs are ever going to account for a significant portion of auto sales they need to reach this threshold or higher. Tesla also says its new "Supercharger" stations will fill 180 miles of electrical power in just 30 minutes. Range and charge time will be key to the future and Tesla is ahead of the curve.
By comparison, the Nissan LEAF has a range of 73 miles, the Ford Focus delivers 76 miles, and General Motors' (NYSE: GM ) Chevy Volt can only go 38 miles on an all-electric run. Tesla is leaps and bounds ahead of these big names right now.
There's also reliability to consider. Panasonic (NYSE: PC ) , a battery maker with history and scale on its side, makes Tesla's batteries. Others have aligned themselves with A123 System and Ener1, who are spending more time in bankruptcy court than the production line.
Starting a car company is hard but, with so many new ideas coming from Tesla, innovation will be enhanced by the company's internal manufacturing and complete control of vehicle design.
One of the challenges in the auto industry is establishing your brand the way you want. Tesla has managed to establish its brand as a high-performance, high-priced vehicle that can compete with BMW, Audi, and Lexus. It can justify a price in excess of $50,000 -- something Nissan and Chevy are having a hard time even coming close to.
The brand will be important going forward as Tesla attempts to sell 20,000 vehicles in 2013.
The power of Elon
Management is a key for any company and Tesla has a CEO and major shareholder in Elon Musk who in my opinion will one day be viewed as a legendary CEO. Musk cut his teeth at Paypal, which was the origin of his fortune; today he is the CEO of Tesla and chairman of solar installer SolarCity. These companies are in vastly different industries but Musk's vision has guided each to early success.
Musk is also doubling down on Tesla's future financially. In a recent follow-on offering, Musk committed up to $1 million of new capital for the company. We should be skeptical when insiders are selling, and equally so when they are buying.
How high can Tesla go?
Tesla has a long way to go before reaching maturity, but it has a tremendous opportunity if successful. Musk has targeted production of 5,000 Model S units this year and 20,000 vehicles next year. He also thinks the company can generate a 25% gross margin next year. If we assume an average sale price of $75,000, then that's a gross profit of $375 million, which will be nearly enough to bring the company into the black.
When the Model X is released in 2014 the company will be able to leverage existing manufacturing and overhead costs and generate an ongoing profit. The key will be maintaining strong pricing and a high gross margin.
There also are supply agreements with other auto manufacturers to consider that will provide upside for Tesla.
It's tough to assess the exact value of the company, but with $1.5 billion in sales achievable next year from the Model S alone, and further upside with the Model S and a next-generation Roadster, I think the company can be worth well over its current $3 billion market cap. Tesla has positioned a strong brand at the high end of the auto market, which should lead to strong margins if EVs take off. It's a risk but one I'm confident Tesla can live up to.
I'm making an outperform call on MyCAPS page and will be buying shares when our trading rules allow it.