Tesla Motors (TSLA 4.96%) has been one of the hottest stocks of the last year, fueled by explosive sales growth and a slew of media accolades:
- 2013 Motor Trend car of the year
- 2013 Automobile Magazine car of the year
- 99/100 rating on Consumer Reports (the highest score ever achieved)
- 99/100 Consumer Reports Owner survey (the highest score in years)
- Safest car ever tested (5.4 stars safety rating in combined vehicle safety score)
In fact, Tesla's flagship supercar, the Model S, is arguably the best car ever made. Tesla is working hard to become the premier electric vehicle maker in the world, having already expanded to Norway and now gaining inroads into the UK, Continental Europe, China, Japan, and Australia (a factory is open in the Netherlands and one is planned in China). The company's supercharger network currently has 120 stations worldwide, but is expected to increase by 200 by year end. By the end of 2015 Tesla says its network will cover parts of Canada, large stretches of China, and almost all of the United States and Europe.
Tesla's investment thesis: hyper-growth, technological innovation, and optionality
Tesla's hyper-growth will come from two key areas: new models and its upcoming Gigafactory. The company is hard at work on its next model, the SUV-based Model X, with mass production expected in early 2015, but there are already over 12,000 pre-orders (requiring a $5,000 deposit, $40,000 for a signature model).
The Model X is said to have a range over 200 miles, sit seven men comfortably, and outperform most sports cars (0 to 60mph in under 5 seconds).
In 2016 Tesla plans to sell a third model, which is expected to cost around $35,000. This third model is designed to take the company mainstream and will require the newly announced Gigafactory, a $4 billion to $5 billion factory (a joint venture with Panasonic) capable of producing 500,000 battery packs/year, at 30% cheaper than today's prices, and 50% cheaper by 2020.
Tesla's extreme growth isn't only from selling more cars -- it's in the idea of optionality, branching out into EV-related services, such as opening up its supercharger network to other EVs (for a price) and becoming the leading provider of fast-charging technology. Tesla announced that it's giving open access to its patents in an attempt to drive EV innovation and adoption. If Tesla can set the standard in battery and charging technology it could make more money from charging other automakers' EVs than from selling its own cars.
The combination of new models, innovative technology, and the optionality-minded genius of Elon Musk has led S&P Capital IQ analysts to project a 37% CAGR for Tesla's earnings over the next decade.
Why Hydrogen fuel cells have no automotive future
Several automakers such as Toyota Motor Corporation (TM -3.23%) , Honda Motor Co (HMC -2.21%) and Hyundai have argued that hydrogen fuel cells, which are 50% efficient (compared to 20%-25% efficiency for regular cars), are the long-term automotive future and invested hundreds of millions in R&D with plans for mass production in the near future. Specifically, in 2015 Honda and Toyota state they plan to start selling about 1,000 cars per year in Europe, the U.S., and Japan. Prices are expected to be around $100,000 per car, but Toyota says it hopes to increase production to tens of thousands of units by 2020 and lower the price to $30,000-$50,000.
As I'll now explain, the track record of these automakers is a disingenuous history of making compliance cars to meet government emission standards, not a true attempt to innovate into the automotive future.
In the 1990's California put in place regulations requiring a percentage of each automaker's fleet sold in California to be zero emission. That requirement is set to rise from 11% in 2009 to 14% by 2015 on its way to 87% by 2050.
Failure to meet these requirements results in an inability to sell cars in California. Car makers get credits for hybrids, plug-in hybrids, electric cars, and fuel cell cars. However, the way the regulations are structured, automakers get up to seven times more ZEV credits/fuel cell car than an electric (four credits/Tesla Model S vs 26 for Hyundai's Tucson Fuel cell).
In fact, Hyundai's Fuel cell Tucson, which just became available for very limited lease is worth $130,000/car in ZEV credits. This explains why the company is willing to lease out the 1,000 cars at a loss -- $3,000 down and $500/month for 36 months. It also explains why Honda was the first automaker to lease a fuel cell car in California (and only California) with the FCX minivan in 2005; only 24 units were ever leased. Between 2008 and 2010 Honda leased the $600/month FCX Clarity -- but only 200 units split between California and Japan.
This is the same small-scale volume Honda and Toyota are planning for their upcoming 2015 fuel cell vehicles, vehicles that were never meant to be mainstream, never meant to turn a profit, but meant to be compliance cars and generate ZEV credits. And there is good reason that these vehicles can't go mainstream -- they are far inferior to battery EVs such as the Tesla Model S.
- Fuel economy equivalent of Tesla Model S is 89 MPGe (Nissan Leaf 114 MPGe) vs Hyundai Tuscon fuel cell 50 MPGe (Honda FCX Clarity 63 MPGe).
- According to the Department of Energy In 2012 Hydrogen cost $8/kg-$10/kg (equivalent to gallon of gas) to make from natural gas, $10/kg-$13/kg from water (long-term cost might come down to $2.75/kg-$3.50/kg from gas, $4.90/kg-$5.75/kg from water).
- Compare to EPA estimated electric cost of $1.07/gallon equivalent (2.5 to 5.3 times cheaper than hydrogen's future, cheaper cost).
- 121,000 gas stations in America, 22,000 charging stations, just 55 hydrogen stations.
- Cost of electric charging station: $100,000-$250,000 vs $2 million for hydrogen filling station.
Foolish takeaway
Tesla Motors is a long-term investment in the innovative, optionality minded genius of Elon Musk and the future advancement of battery technology. Fuel cells are an inferior automotive technology and for fundamental efficiency, cost, and infrastructure reasons always will be mere compliance gimmicks.
