Now Is the Time to Buy Tesla Motors

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.

Innovation
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.

Brand
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.

Fool contributor Travis Hoium has no positions in the stocks mentioned above. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. The Motley Fool owns shares of Ford and Tesla Motors. Motley Fool newsletter services recommend Ford, General Motors Company, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (16)

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 October 24, 2012, at 2:38 PM, spawn44 wrote:

    Travis. You mentioning its time to buy a FEW SHARES was the smartest thing in the whole article.

  • Report this Comment On October 24, 2012, at 4:40 PM, bzhayes wrote:

    "Elon Musk who in my opinion will one day be viewed as a legendary CEO" He will be legendary the same way MC Hammer is legendary. He was good at one thing and is now throwing all his money away discovering that doesn't necessarily make him good at other things. The best hope for Tesla is to be bought out by a major auto manufacturer. Those bids aren't usually multiples of the current stock price,

  • Report this Comment On October 24, 2012, at 4:47 PM, mdk0611 wrote:

    And what if the tax credit for EVs goes away or is reduced as part of a tax reform bill? I'm not sure I'd buy even a few shares before the election

  • Report this Comment On October 24, 2012, at 6:28 PM, gene132 wrote:

    Frankly, Elon Musk is going to learn about the auto industry..the hard way. Like Preston Tucker and Henry J. Kaiser, he will lose a ton of money, and have nothing to show for it. Kaiser said it best:"I tossed $100 million into the pond..I didn't expect it to disappear without a ripple".

  • Report this Comment On October 24, 2012, at 6:37 PM, Fred4953 wrote:

    The major component that makes the Tesla car break speed records is its unique electric motor. It is made exclusively by UQM, a Colorado firm, and I have been buying its shares for 2 years. UQM has invested plenty in its future production, and any large production run will be a boon to its shares. But the real killer is the very high sticker price Tesla has demanded. Remember,, that FORD guy built his durable autos for the mass market, and prospered. Packard & Dusenberg died.

  • Report this Comment On October 24, 2012, at 7:45 PM, SuntanIronMan wrote:

    Tesla aside, I just don't see the appeal of being a long-term shareholder in any automaker company.

  • Report this Comment On October 25, 2012, at 10:19 AM, jaekwon wrote:

    * We still need automobiles because the infrastructure of the entire nation is built on it.

    * We can't continue to burn fossil fuels because it isn't sustainable. Not to the economy, and not to the environment. The Keystone pipeline is a national security vulnerability.

    * Tesla is the most promising EV car manufacturer on the planet.

    * Elon Musk, its founder and CEO also happens to be a major owner of a promising solar power company.

    * The frack'n car runs on sunshine, for free!

    * Remember the NPR "All Things Considered" program about the Nummi plant, the one that learned from Toyota? Yeah, that's the one that Tesla bought.

    * Tesla is about to become cash-flow positive.

    Now, do you really think that the regulations of the auto industry is going to stop Tesla from becoming successful, when we need it the most?

    If you want a bright future, buy some Tesla and hold it long.

    If you're short, get out while you can. A tsunami of hurt is coming.

  • Report this Comment On October 25, 2012, at 10:22 AM, svenhh60 wrote:

    Did Tesla pay for that/your opinion and market-company-report ? Here in Germany the e-mobility-hype is gone and more and more the way to use hydbrid-solutions i.e. with fuecells (hydrogen) is going its way nicely. Tesla has 2 years to show they can be successful...and then....fc-hybrids 2014...coming big way (Daimler, Toyota...Honda...)...the battery is the hurdle, and the comfort (hydrogen = 3 minutes for a fill) but hours with a battery...radius is a big hurdle...price..too....about 30 mio shares short in Tesla (more than 50 % of free-float) mean that someone near the company (not normal short-sellers) cashed-in already of secured the book-profits (you might argue that the short-interest sometime might be a good puffer when the stock is much lower and some shorted shares being bought back).....The stock under US $ 10 in 24 month...and we all guess....

  • Report this Comment On October 25, 2012, at 12:36 PM, lagunagreg wrote:

    Sven, none of the big makers has solved the design problems of hydrogen storage for fuel cells. It's highly explosive, so you need a strongly reinforced tank to hold it. But that much reinforcement makes the tank almost too heavy to use in a vehicle that needs to be as light weight as possible.

    I haven't read anywhere that, besides prototype test vehicles, anybody has overcome these design limitations. So I don't see anybody putting a fuel cell vehicle on the market by 2014. It would be great if they did, but they're going to find a better way to store the fuel.

    Which still leaves the field open for an all-electric vehicle like the Tesla.

  • Report this Comment On October 25, 2012, at 12:37 PM, Darwood11 wrote:

    Interesting article. However, with oil based energy in the U.S. expanding and that includes natural gas, I'm of the opinion that electric vehicles are a very long term development proposition.

    I have more than a few problems with the current paradigm.

    I've decided that before I invest heavily in any electric vehicle, and that includes a long term purchase of company stock, or a vehicle itself, certain concerns need to be addressed.

    1. On it's own merits, and that includes costs and performance and energy, the vehicle must compete with current hydrocarbon based technology.

    2. Presently, about 42% of all electrical energy distributed via the grid is from coal fired electrical generating plants. 86% is from combined fossil fuel and nuclear plants. 7% is from hydroelectric. All other renewable sources combined provide about 7% of the grid, and solar less than 1/5 percent of the total! This indicates that electric cars are not really a not a green option.

    3. It must achieve cost and performance similar to a the level achieved with hydrocarbon vehicles. For example, I drive a Subaru WRX. Great performance, 4WD, 150K minimum mileage for the vehicle, etc.

    4. CO2 emissions per mile based on current power plant totals would be a factor in my purchase decision.

    5. Vehicle installed costs are part of the equation. In other words, purchase price, installation of 220V rapid charge station at home, etc. Battery pack replacement is expensive. $8,000 for the Volt and $18,000 for the Leaf. I am unaware of the published cost for battery pack replacement for the Tesla coupe.

    6. Unknown questions to be resolved include who is to pay for the difference in gasoline subsidies of interstate highways via fuel excise taxes, and how? If this government subsidy of electric vehicles were to change, and I expect it would if there were any large scale electric car deployment. Or are gas and diesel vehicle owners to pay this as a sin tax?

    7. Electric vehicles are not "zero pollution vehicles" if one takes into account the sources of the electrical energy for recharging the batteries. Mr. Musk at Tesla has been honest about this, describing the vehicles as having "zero tailpipe emissions:"

    8. There is no indication that the current grid can support large scale electric vehicle deployment; in fact, the evidence is to the contrary.

  • Report this Comment On October 25, 2012, at 12:46 PM, cslobo wrote:

    To all the naysayers, humor me and go test drive a Model S. The more people experience it, the more this company will take off. Sven, the amount of electricity it takes to get the hydrogen...you're better off just using that electricity in an electric motor. To add to it, most of the combustion is lost in heat = less efficient. Hydrogen is a pipe dream and always will be. With all this said, I don't see this truly being an "explosive" stock. Not just yet. If battery tech improves and range increases, people will be more apt to buy. But from a pure performance and driving enjoyment, cars like the Model S are here to stay.

  • Report this Comment On October 25, 2012, at 12:47 PM, Darwood11 wrote:

    Here's the EIA data on renewable energy sources in the US in 2011: As renewable was 13% of the total, this has been normalized to a percent of 100% of electrical power generating sources:

    Hydropower 8.19%

    Wind 2.99%

    Biomass Wood 0.91%

    Biomass Waste 0.52%

    Geothermal 0.39%

    Solar, less than 0.13%

  • Report this Comment On October 25, 2012, at 1:02 PM, cslobo wrote:

    Regarding the emissions debate, it's far easier to regulate and maintain the emissions from a handful of "tailpipes"(powerplants) than it is a billion tailpipes(ICE cars). Is electric perfect? No. But considering the eMPG is on average more than triple that of average ICE cars, it is clearly a move in the right direction. But forget all that. This car is a blast to drive. I've driven a Ruf 911 that was race spec'd and the 911 has NOTHING on this 4 door, 5+2 passenger Model S SEDAN! Nothing. The fit and finish felt like a BMW/Merc/Audi. Being that it is priced as the luxury sedan that it is, it's more of a niche market, thus the stock won't move wildly until possibly after their Gen III car "for the masses". Even then?? They have an uphill battle, but they produce a phenomenal product.

  • Report this Comment On October 25, 2012, at 1:21 PM, lagunagreg wrote:

    Lobo, you make a good point. I test drove the Tesla Roadster when they opened their showroom in Newport Beach a couple years back. That car is sex on wheels, just like all the Italians! I wish they still made it.

    While I appreciate Dar's points, he leaves out the eMPG efficiency factor and the public's perception of ICE cars depending on fuel made in the Middle East. I'm sure the public would much prefer to use a fuel source that can be produced domestically. Not to mention that it makes better public policy to use develop domestic strategic energy sources. Not to mention the economic stimulation such a policy would support, et cetera et cetera. Imagine how many jobs upgrading the national electric grid would create.

  • Report this Comment On October 25, 2012, at 3:37 PM, Darwood11 wrote:

    The point of my comments is this. The "early adapters" should do so for strictly personal reasons. Forget about any excuse. I like cslobo's comment. Do it for the sheer fun and if you can afford it. But don't do it for any other reason.

    In my case, an electrical vehicle, bicycle or moped excepted, is a luxury purchase. I think for most people in the US, purchasing a $60-100K vehicle is something beyond most of us. [For an example, there is currently a companion article at the Fool entitled "5 Reasons the Middle Class Is Feeling Poor."

    I agree with lagunagred about the incredible jobs opportunity that will be created by an expanded national grid for electric cars. However, there is already a plan underway which is dictated by the expansion of wind power, and has the purpose of getting that electricity to the mainstream. That will require an incredible secondary grid. However, it's 20 years in the future.

    As with so many non-service jobs in the US, and that includes the current shortage of 10,000 wind turbine technicians, I have not a clue how our "service economy" sit-behind-a-desk inebriated culture will provide the man- and woman-power to get this done. Does anyone????

  • Report this Comment On October 26, 2012, at 4:49 PM, klcompren wrote:

    Regarding first mover advantage, actually Toyota was not the first mover in Hybrid vehicles. Honda had the Civic Hybrid well before the Prius was introduced. Toyota just did a better job of marketing.

  • Report this Comment On October 26, 2012, at 7:17 PM, stevedb wrote:

    I don't do any commenting on these boards, but when I read this I thought Mr Hoium dropped from another planet, like Krypton. Look I know the arguments - non-renewable energy sources, CO2 emissions, blah, blah, blah. The issue is, guys and gals, people ain't eatin' very much of the dog food out there, even with taxpayers kicking in $7500 a pop, a travesty.. Yea, I know the Prius as sold over 2M vehicles - but it took over 10 yrs to do so. GM, to its credit, suspended production on a real car, the Chevy Volt, it saves money by doing so because it is loosing $'s on each. Can't make that up in volume! Tesla's first vehicle was a bust and I can't believe MF is falling for the sales projections they are making. $50K will not buy one; its starts @ 60 for the low mile model and will be close to 90k out the door for the hi-mile model. It may look great, drive great, and the owner will look responsible cruising Hollywood Blvd but don't look for it outside the 1 percenter population centers. There is no infrastructure to support it unless you install your own charging station at home or wherever, like your country club. Panasonic, despite its ok brand, has not proven it self in high cap Li-ion batteries. And to recommend it's stock as a long term investment is just plain irresponsible if not just stupid. Auto manufacturing is a business that if you aren't selling half a million cars/yeat, you are outa' business. And Elon Musk has no chance of doing so. Fools stay away from this dog!

  • Report this Comment On October 29, 2012, at 3:54 AM, Taratora wrote:

    "Musk cut his teeth at Paypal ..."

    He was kicked out of PayPal for stubbornly leading the company into wrong direction (judging by how PayPal progressed without him).

    For reference read the book -- http://www.amazon.com/The-PayPal-Wars-Battles-Planet/dp/0974...

  • Report this Comment On October 30, 2012, at 4:19 PM, aeromarine wrote:

    Anybody subscribe to AUTOMOBILE magazine? The cover banner on the November issue is "Ultimate Automotive Fantasies". And who do they interview? Elon Musk. Some of his out takes: "Other start-ups brought cars into production--DeLorean and Tucker did it--they built up debt, and then they died." "My advise would be, unless (you) have some compelling nonmonetary reason to create a car company, as I did, then it is not a good use of capital." And finally, "It would suck if I went insane. I really hope that doesn't happen."

    Yeah, that really sound like the captain of a financial ship I'd want to board!

    On another note, the folly of the all-electric was brought home to me driving down the I-5. A Nissan Leaf was sucked in behind an 18 wheeler trying to draft his way home before the "Game Over" light went from blinking to solid. Anybody who has ever run out of gas knows that feeling. When the hybrid has already been perfected who, other than uber-eco-snobs, needs the all electric?

  • Report this Comment On October 30, 2012, at 5:22 PM, stevedb wrote:

    #aerimarine, good catch. I read Automobile avidly and had forgotten this except for the sour taste that it left in my mouth, or was that acid reflux? Musk's arrogance is apparent; BTW, same for Dan Ackerson GM chair, or shoud we say "volunteer" chair?

  • Report this Comment On October 31, 2012, at 6:53 AM, ruester wrote:

    I have to express my flat rejection of this article. $75K will not sell. Price point is way off and therefore so are projections.

  • Report this Comment On November 13, 2012, at 5:11 PM, stevedb wrote:

    Wow! 2013 Motor Trend Car of the Year. Obviously they love it. Great piece of technology but still not a good reason to buy the its stock.

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