Why I'm Betting on Tesla Motors Stock in 2014

Going into 2014, my second-largest, real-money holding is Tesla (NASDAQ: TSLA  ) . Though it's tough to guess where the stock will go in the next 12 months, over the long haul I'm placing my bets on a bullish future. I think Tesla's current price levels provide investors a reasonable entry point into a stock with enduring characteristics. In fact, I'd go as far as to say that Tesla is one of 2014's best opportunities.

Model S. Source: Tesla's official Twitter feed.

Reflecting
I haven't always been bullish on Tesla stock. I debated that Tesla was overvalued when it reached levels around $190 per share. In fact I sold shares at about $165. Recently, however, I decided that selling was a mistake. I bought shares in the $130 range when three fires in five weeks drove the price down.

Notably, trading in and out of a stock like this isn't a reflection of my typical buy-and-hold investment style. Instead it simply reflects that fact that I changed my mind regarding my outlook for Tesla stock. The fact that the trades worked out favorably was simply luck.

Though when I sold shares the first time I believed the stock was fairly valued if it could actually sell hundreds of thousands of its alleged more affordable Model E per year by 2016, I also believed this to be the best-case scenario for Tesla. And in any projection, it's important to give weight to the probability of all the potential outcomes -- even the worst-case scenarios. That led me to believe that a bet on Tesla Motors' stock at levels that clearly priced in mass-market adoption of its Model E was purely speculative.

Why Tesla shares look undervalued
So why did I change my mind about Tesla stock? Here are the two arguments most important to my bullish outlook for the stock

Lack of competition: There's clear demand for Tesla-style electric vehicles, and competition has yet to react. When I say Tesla-style, I'm referring to high-performance, long-range, purely electric vehicles.

The value proposition of a fully electric car with meaningful range is far different than the value proposition for a hybrid. Tesla's vehicles, unlike hybrids and ICE vehicles, allow the owner to ditch gas stations forever. It means having a fully charged car, every morning, ready to drive hundreds of miles.

Even more, it's already evident not every manufacturer will be betting heavily on electric vehicles as a future means of sustainable transportation. Toyota and Hyundai, for instance, are placing some of their eggs in the hydrogen fuel cell basket. Many manufacturers are continuing to make big bets on hybrids in their 2014 models as well. No one, however, has launched any vehicle that resembles the combined fully electric range, style, and performance of Tesla's Model S.

Sure, Tesla will inevitably face competition from vehicles with the same value proposition. But, as the only current major pure-play in all electric vehicles, every day without competition is another day for Tesla to get ahead.

No, the future probably doesn't belong entirely to electric cars. On the other hand, it also probably won't belong entirely to hydrogen-fuel-cell vehicles or hybrids. What we do know is that initial demand for Tesla's vehicles suggests that electric cars will inevitably play a meaningful role in the future of transportation. And, unlike its peers, Tesla won't be splitting its efforts across different vehicle technologies. As of today, Tesla is the only major player that looks like it will be focusing purely on electric vehicles. As the automotive industry's only proven and fast-growing pure-play in electric vehicles, Tesla won't be giving up easily to competition as it inevitably surfaces.

Execution: Tesla is executing beyond expectations in many different areas.

In 2013 Tesla exploded onto the scene. The company is on pace to sell 21,500 Model S in 2013 -- up from just 2,650 in 2012.

Model S

Its Model S boasts an exhaustive list of impressive accolades, proof that electric cars have the capability to perform exceptionally well.

Even more, Tesla has surprised investors in 2013 with plans for a rapidly expanding Supercharger network that is already under way.

Tesla's global expansion, too, is already looking hot. With plans for deliveries in China in Q1, and having started European deliveries last quarter, Tesla looks poised to have a global presence by the time it introduces its lower-cost car during the planned 2016 to 2017 time frame.

A next decade investment
The absence of meaningful competition and Tesla's rapid expansion give me confidence in the bullish outlook I used to view as a best-case scenario. Annualized combined Model S and Model X deliveries exceeding 50,000 units by 2015 and Model E deliveries to the tune of hundreds of thousands of units per year by 2017 now seems like a reasonable expectation. Not to mention a planned attempt to eventually take on the best-selling vehicle in the U.S. for over three decades with a Tesla truck.

Importantly, however, given the forward-looking valuation the market has given Tesla, investors who buy Tesla stock shouldn't do so with the intention of making a quick buck. The pricey valuation almost guarantees fluctuation and unpredictability in the short term.

Zooming out, however, Tesla is an excellent stock for investors with a Foolishly long-term outlook. Tesla's excellent management, proven execution, and first-mover advantage in a fast-growing market of fully electric cars sets the stage for an investment I can imagine myself holding for decades.

Whether you agree with me that Tesla is an excellent investment or not, it's important to carefully weigh the range of outcomes you see as possible before you decide Tesla is a buy. As a stock that is priced entirely on future expectations, the value of the shares today is almost completely reliant on events that haven't yet unfolded. So a slight difference in expectations can have a dramatic effect on the stock's fair value today.

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Comments from our Foolish Readers

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  • Report this Comment On December 22, 2013, at 8:11 AM, JouniValkonen wrote:

    I think that the biggest limiting factor for Tesla is that its philosophy is not to pay dividends to the owners. And as Elon Musk is the largest shareholder, he has enough influence to ensure that Tesla uses all revenue for expansion and making the World better place. Therefore Tesla is not that great long term investment opportunity.

  • Report this Comment On December 22, 2013, at 10:34 AM, TheOstrich wrote:

    As the U.S. becomes energy independent and gas prices fall, The Tesla argument fades. Can they compete with $2.00 a gallon gas in a hybrid?

  • Report this Comment On December 22, 2013, at 10:44 AM, duuude1 wrote:

    Jouni, I believe it is imperative for small start-up companies to invest as much as possible into their own growth early on - and there is not much to pay out for dividends anyways.

    Just a couple examples out of many: AMZN invests everything into growth and pays out no dividends - imagine avoiding AMZN back in 2000. NFLX invests everything into content and growth and pays out no dividends - imagine avoiding them back in 2003. AAPL invested everything into product development and from 2005-2012 paid out no dividends - imagine avoiding AAPL back then.

    Lack of dividends is not limiting for TSLA - although if you are more interested in large, dividend-paying corporate giants like WMT then it makes sense that TLSA is not for you.

    Folks like me who are interested in investing in TLSA are not interested in dividends, but in a small, rapidly growing, game-changing company led by a visionary and proven leader.

    Duuude1

  • Report this Comment On December 22, 2013, at 1:53 PM, ashaskevich wrote:

    @ theostrich. You are wrong. The price of gasoline will have to drop to $1.25/gallon and gas powered vehicles will have to make 40 mpg city for electric to not be feasible. The days of gasoline at $1.25/gallon are long gone.

    Hybrids will get 40mpg in the city but you are dealing with 2 powertrains, and a mass of electronics. Big battery pack underneath with one small electric motor is the way to go.

    More drilling for natural gas will occur, and that will be used to make electricity for electric powered vehicles. Power plants run 24 hours, but people charge up cell phones and will charge up cars over night so the power grid will not be affected.

    This article is one of the first that I have seen that I can agree with. Tesla Motors is the future and they are building a monopoly right now. The most incredible thing is that the other automakers are ignoring what is happening or they are in denial.

    You decide if it is denial or ignoring reality.

  • Report this Comment On December 22, 2013, at 3:11 PM, deeageaux wrote:

    @ theostrich

    @ ashaskevich

    As Mexico, Canada and the rest of the world increase oil production it will put downward price pressure on the price of oil.

    IF the price of oil falls significantly will make new high cost American wells uneconomic and they will be capped.

    Increasing American dependence on foreign oil and pushing the price of oil back up.

    I don't see demand for oil in China remaining steady if the price falls significantly either.

  • Report this Comment On December 23, 2013, at 2:53 PM, Decoy0527 wrote:

    I've followed Tesla for over a year now, simply because it is one of the most interesting companies around, and in addition Tesla has a very interesting product and CEO. It seems to me that a good portion of Tesla's appeal is emotional, that is, that investors and buyers of the product want it to do well and think it will do well because it would be good for the environment. I hope it does well also, but to support a $140 share price, Tesla needs to earn about $10 to $12 per share per year, and I don't see how that can possibly happen. If the product comes to have mass market appeal, BMW, Audi, Mercedes, and Toyota will jump into the space and bring margins down to that of other mass produced cars. So, good luck longs, but I think that at $140 it is not going to work out for you.

  • Report this Comment On December 24, 2013, at 11:40 AM, Ostrowsr wrote:

    Best move for Tesla would be a Natural Gas engine and electric hybrid combination. I would not be surprised to see Elon Musk add a high efficiency solar panel as a sky light and further reduce operating costs. And this excellent engineer has many other options.

  • Report this Comment On December 25, 2013, at 2:32 AM, jeffhre wrote:

    deeageaux, you do realize where Canada gets it's oil? New production is most certainly not cheap. Oil is increasing in production precisely because of expensive wells. The marginal cost of oil will determine price.

    If no additional oils were needed, expensive wells would never have been brought into production in the first place. The cost of oil has risen the make previously unprofitable well sites the reference price for a barrel of oil. New oil sets the new price, or there would be no new oil!

    High priced American wells have the potential to decrease in operating costs and net pricing after applying improving production processes and amortizing exploration and initial production costs. Then the new, new wells will determine price on the margin.

    "I don't see demand for oil in China remaining steady if the price falls significantly either." Not sure what that means, unless it is intended to show oil defies the laws of supply and demand. Demand for oil in China falls with price drops?????

  • Report this Comment On December 25, 2013, at 7:04 PM, LAVol wrote:

    I have read that battery production capacity is the main restriction on electric vehicles. From what I have read, unless someone invests billions in a plant to increase capacity, the number of electric vehicles produced will be limited. And, if a battery plant is built, the fixed cost is so high that the cost of batteries will increase dramatically, making electric vehicles uncompetitive. Until I see a resolution to this issue, I would not be inclined to invest in Tesla.

  • Report this Comment On December 25, 2013, at 7:25 PM, Seanickson wrote:

    So what do u think tesla is worth?

  • Report this Comment On December 25, 2013, at 7:37 PM, LAVol wrote:

    Jeffree,

    You stated that "Oil is increasing in production precisely because of expensive wells."

    It is estimated that prices would have to drop to $70 to impact oil drilling in the Bakken. Currently, wells are being drilled at a cost of about $7MM per well. Not expensive at all.

    Pioneer Natural Resources has drilled 16 wells in the Spraberry Wolfcamp at a cost of about $7MM per well. With 3600/d BOE production, the payout at todays prices is about 20 days, indicating prices would have to be well below $50/BOE to discourage drilling. AND, PXD is saying the Spraberry Wolfcamp may be the second largest known oil field in the world, second only to Saudi Arabia.

    Most all of the shale plays (Bakken, Utica, Marcellus, Eagle Ford, Haynesville, Spraberry Wolfcamp, etc.) are not expensive wells to drill. And, that is where the production boosts are coming from.

  • Report this Comment On December 25, 2013, at 9:28 PM, ershler wrote:

    LAVol,

    Those are expensive wells compared with a straight hole with no fracking, no matter what the pay back period is. What is more expensive besides offshore?

  • Report this Comment On December 25, 2013, at 9:44 PM, common69sense wrote:

    Buy a stock and hype it. Where is the value add?

  • Report this Comment On December 25, 2013, at 10:23 PM, volcan357 wrote:

    I think the Tesla stock is a bit of a gamble although they might eventually do well. No doubt that at some point in the future electric cars will be more common but exactly how it will play out is hard to say. I seriously doubt that gas prices will go down much in spite of new sources of oil but gas prices might stay flat for a number of years without any significant increases. It seems that battery technology is the big drawback. If there is a breakthrough in battery technology then the electric car would really take off. For now I think the electric car will just be too expensive for most people. A small fuel-efficient conventional car will be more economical to buy and maintain. The CEO of Tesla is pretty smart so if it is possible to be successful with the electric car then he is the one to accomplish it. There will always be some people who will pay extra for something like an electric car.

  • Report this Comment On December 26, 2013, at 3:26 AM, stefaith wrote:

    I have read much about Tesla the car, and it is highly favorable.

    I have also read much about Tesla the company, and again the general opinions seem to be positive.

    However Tesla the stock is another story. I tend to doubt that the eventual payoff, if indeed it occurs, justifies the present price.

    Given the extent of the known unknowns, and the unknown unknowns, I cannot feel comfortable pinning my financial future to this stock. However, nor can I risk ignoring it altogether. Therefore I own a few shares, representing 1% of my portfolio. If Tesla the stock crashes, it wont kill me; if it takes off to the moon, I won't kick myself to hard for missing the boat

  • Report this Comment On December 26, 2013, at 11:50 AM, Vechiger wrote:

    Well Tesla doesn't have the monopoly on all electric cars as Nissan has been selling the Leave for some time now. Then BMW has just introduced its version and I am sure that others soon follow and price will be a major factor.

  • Report this Comment On December 26, 2013, at 2:02 PM, PatCampbell wrote:

    As a Leaf owner, its not just the cost of gas that is an issue, its the maintenance an ICE vehicle requires. I just spent over $2000 on scheduled preventative maintenance on my (now) backup Subaru Forester. The Leaf doesn't have a timing belt, oil to change, fuel injectors, etc., etc. You can just feel the Nissan dealer cringe over the lack of servicing Leafs require. In fact Nissan might to well to split off the Leaf line and treat them for sales and service as Tesla does their vehicles. Simplicity, low maintenance, cheap power, and a great ride make EV's winners. They can work most of the time for 75% of the consumers once the mystique comes off and the price continues to drop.

  • Report this Comment On December 26, 2013, at 3:00 PM, tra6cer wrote:

    You seem to be enamored with a car that at the present time runs on 40% coal. Until we get smarter about our source of electricity and its production we just move the pollution to a less obvious location.

  • Report this Comment On December 27, 2013, at 3:02 AM, Chopkoski wrote:

    @ ashaskevich..The problem is...with NIMBY the name of the game...where have you last seen a new power plant that runs any any substance known to man being built? Now, I could be all wet on this but as per the evening News Everywhere, we live in a Holy Place where...well, like the Hindu cows go, things have become really sacred in many places. (Over sacred is probably a better term...)

  • Report this Comment On December 27, 2013, at 3:04 AM, Chopkoski wrote:

    @, tra6cer I guess you fancy the flight of wind wings that ramp up the energy flow along with tidal turbines. And do you know just how much electricity they produce?

  • Report this Comment On December 28, 2013, at 10:00 AM, AnsgarJohn wrote:

    @Seanickson "What's it worth?" to answer that for pretty much any controversial company Google: "Aswath <company name>"

    Tesla was worth $67,12 in September 2012 according to Aswath Damodaran.

    Musk, I think, was still buying around $90.

    What Tesla is doing on the German autobahn in 2014 is also mindblowing, and the Germans love Musk.

  • Report this Comment On December 28, 2013, at 10:42 AM, susan400 wrote:

    Be my guest. TMF is a great space to make a case but too often it becomes an exercise in sounding clever vs not necessarily.

    Long term autoes have NR done well, capital hungry, capital cnsumers. Ok less so in the recent cycle but.

    For me, none.

    I will look it overas a short cantidate ibut its popularity can mean even if it is not a good co, can go wild first.

  • Report this Comment On December 28, 2013, at 10:43 AM, susan400 wrote:

    not done well that was

  • Report this Comment On December 28, 2013, at 3:54 PM, FutureMonkey wrote:

    There is no doubt in my mind that Tesla is a disruptive company that is selling the most desirable product in auto market today. Certainly there will be competition in the EV market and the traditional automakers are not going to simply stand aside and let Tesla go unchallenged. Fortunately for early investors, Tesla only needs to capture a fraction of the global automobile market to exceed expectations and continue rapid growth.

    To me the story is not EV vs Hybrid vs Hydrogen Fuel Cell. To me the story is the Brand Elon Musk is building. Tesla is so much more than a one-and-done vehicle and investors sitting around hoping to sell a lot of cars. Elon Musk is building the Tesla brand in across the whole transportation sector, as well as disrupting the traditional model of manufacturing, marketing, and sales. Investors risk is based on the assumption that Musk will continue to innovate and grow the brand in order to maintain Tesla's competitive edge.

    Overall I find Tesla an interesting investment choice. Personally I'm in with real money, but not in my top 5 positions by value ... yet

    FM

    PS. @Pat Campbell You pointed out one of the biggest advantages electric-only cars like Leaf and Tesla S has over hybrids or traditional ICE -- minimal maintenance cost/time. Also crash-test safety on the Tesla S is superior to all other passenger cars available <period> The most compelling reason to buy a car to this father of two.

  • Report this Comment On December 29, 2013, at 8:51 AM, drax7 wrote:

    I expect tesla to sell 50,000 model S and 50,000 model X , per year, within two years.

    At a net profit of $10,000 per car that equates to 1 billion dollar net profit. You can assign that a p/e between 30 to 50 to obtain a market cap between 30 to 50 billion dollars.

    That projects a price between $240 and $400 per share given the 120 million shares outstanding.

    Pure guess estimates, let the games begin.

  • Report this Comment On December 30, 2013, at 5:01 PM, ptashner wrote:

    It seems Musk and his game-changing companies including Tesla are hitting on all cylinders. Ok, electric circuits.

    He broke the US manufacturer distribution monopoly via franchised dealer network, meaning he can sell direct via new media. And not coming from the old-line car industry he has a huge leg up on innovation and customer service (ever try to get one of the major manufacturers on the phone for real solutions?). Here's my take:

    1. Product - outstanding test results, features, and a 2 month "order and wait for your vehicle to be built to your specifications". No product inventory sitting around depreciating or needing big discounts to sell or bank financing driving up costs.

    2. Distribution - direct from responsive manufacturer to customer. After the 3 fires, Musk personally reached out and talked to the owners - and all 3 ordered new Tesla's. Brand loyalty and excellent customer contact! When was the last time one of the big manufacture CEO's reached out to talk to their customers - and listened?

    3. Pricing & Margin - with no expensive dealer network holding expensive inventory and paying huge floorplans, even with competition from other major manufacturers Tesla wins the margin game with at least a 10% advantage if other manufacturing costs are competitive.

    4. With a 2 month backlog of orders in the US, it's incredible they have focused on international growth in premium markets. Germany is a premium car market (BMW, MB, Porsche, etc.) of about 3 million new cars a year. Germany is also VERY GREEN. While other American cars adapted for international customers found small niche buyers, I see Tesla hitting it out of the ball park with European homologation of a premium product Europeans will love. Not to mention possible and very significant tax advantages, no emissions, no CO2, and other things that are very important to EU car buyers. Oh, and about $7 a gallon gas - indeed electric will be much better for Europe. Germany and the UK (if Tesla offers Right Hand Drive) will be very profitable markets. And the price is in the ball park for premium sedans sold in those markets.

    China will be a huge bonus - and again with at least 150 million wealthy people in China and a green movement starting, there will be plenty of buyers. It will soon be a 20 million new car market - with more than enough buyers for premium Tesla's.

    Japan also offers exceptional opportunities for the RHD version - again with plenty of well-heeled buyers, a strong Green movement, expensive gas and taxes on big engines. Many international markets are exceedingly viable markets where they must import all their coal and oil based-energy and it is extremely expensive.

    5. Synergy with SolarCity offers excellent prospects for solar panel sunroofs, or even a new solar upper body surface that could revolutionize electric cars and make them energy independent. Recharge on sunny days as you drive or as your car is parked in the parking lot.

    6. It seems to me their biggest threat is being able to supply enough cars to meet the demand. 1% market share in the US would net them 160,000 sales. 1% in Germany = 30,000 sales. UK = 15,000 sales, .05% in China = 40,000 sales. I can see 250,000 sales a year within 3 - 4 years. Using $10,000 margin per car = $2.5 billion on $125 billion in sales (assuming an average selling price of $50,000). Those international markets can be substantially more lucrative. If they perfect a recharging system on the roof, game's over and Tesla will be doing victory laps.

    Stay nimble and inventive Mr. Musk, and avoid the old car industry in-bred corporate think and massive bureaucracies that restrict true innovation. They give us bells and whistles, while you are changing the game.

    And for investors, I'd say the long-term looks rosy indeed.

  • Report this Comment On January 12, 2014, at 2:05 AM, missoulamike wrote:

    drax7, you're high if you think they will be selling 100k vehicles at 10 grand profit apiece.

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