Why Tesla, Not Fuel Cells, Owns the Automotive Future

Tesla Motors (NASDAQ: TSLA  )  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)

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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 (NYSE: TM  ) , Honda Motor Co  (NYSE: HMC  ) 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.  

Warren Buffett's worst auto-nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.

 


Read/Post Comments (10) | Recommend This Article (11)

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 June 22, 2014, at 1:49 AM, DrGoldin wrote:

    I'll sell Tesla when I've earned enough in Tesla to buy a Tesla.

  • Report this Comment On June 22, 2014, at 7:42 AM, ToddRLockwood wrote:

    Fossil fuel based technologies, including those based on natural gas, will fail in the long run because they don't really solve the CO2 problem. Even if car manufacturers manage to reduce CO2 emissions by 50% over the next decade, the number of cars world-wide will have more than doubled during that same period. We won't have gained anything. The combination of solar energy and electric vehicles is the only long-term solution for sustainable transportation. This has been Tesla's mandate since the company was founded in 2004.

  • Report this Comment On June 22, 2014, at 9:22 AM, AdamGalas wrote:

    Indeed, a recent study showed that trying fuel cells more CO2 than regular cars because today, 96% of hydrogen is produced from natural gas. If CO2 emissions are one's chief concern than fuel cells are not the way to go.

  • Report this Comment On June 22, 2014, at 10:19 AM, dannystrong wrote:

    The Fool is still slavishly pushing Tesla stock, I see. "The S is the best car ever made?!?" Maybe in your mind, matey, but its just absurd to the rest of us.

    Get it through your head: batteries are bad. They are at the end of a long power generation chain (and don't wave your hands and say "solar", please. It's just pathetic), and *then* inefficiently convert it to a chemical form, and then inefficiently back. (And oh by the way, they lose that energy completely just sitting there.)

    Also get it through your head: Tesla is selling cars in toy amounts. You cannot know the long-term effects of masses of them (or indeed any other battery-only car) on the power distribution system, or even the environment, what with all the nasty things that go into them batteries. (Look up cobalt someday.) Just because Elon Musk tells you everything will be well and, (near as I can tell from all the promises he spouts) free, does not make it so.

    Oh, and one more. "Plans" are not products. I have plans to build a power generation system that will generate a megawatt from the power of one person staring at a wall for 15 seconds. Can I please have the Fool's energetic public relations help so I can sell stock and become rich too?

  • Report this Comment On June 22, 2014, at 10:29 AM, OneHundredxFifty wrote:

    In their list of accomplishments, The Fool left out that Tesla's are fast, very fast! Faster than most Ferrari's.

    http://handlemanpost.wordpress.com/2013/08/25/tesla-performa...

  • Report this Comment On June 22, 2014, at 10:41 AM, ToddRLockwood wrote:

    @ dannystrong:

    The "best car" is in the eye of the beholder, but the Tesla Model S is certainly the most technologically advanced car ever made. Nothing else comes close. Tesla's cars are not perfect—no car ever will be—but Tesla has taken the on the issue of sustainable transportation like no other manufacturer has. And given that automobiles are the largest source of man made CO2, this will become a critical issue in the not-too-distant future.

  • Report this Comment On June 22, 2014, at 11:04 AM, SteveTG3 wrote:

    Thanks Adam.

    I'd seen articles that systematically debunk the fuel cell hoax in terms of its utility, but your article is the first I've seen to expose the enormously out of scale ZEV credit reward for fuel cells incentivizing Toyota and the others carnival barking fuel cells.

    I find that ZEV credit mismatch enlightening... could you provide a link to this?

    Here's a link to a thorough article debunking the viability of fuel cell vehicles for anyone interested:

    http://www.thenewatlantis.com/publications/the-hydrogen-hoax

  • Report this Comment On June 22, 2014, at 8:34 PM, AdamGalas wrote:

    Great to see so much reader interaction. Some quick thoughts:

    1. My "best car" statement is from a combination of superlatives. Consumer Reports did call Tesla S the best car they've ever tested. It is the safest car ever tested, and automotive press calls it one of the best performing cars they've ever tested. Also, owner satisfaction reviews are off the charts, 99% satisfaction.

    Best car may be a subjective term, but the evidence is great that if any car ever made can be given this title, the Tesla S would be it.

    2. For those who argue that batteries are toxic and bad and thus fuel cell's are the way forward you should know that Hyundai's Tuscon Fuel Cell has a 24 KWh battery, larger than the all electric (and thus inferior) Nissan Leaf. The reason why is that the fuel cell can't generate sufficient power (thus 0-60 in 11.5 seconds) and so a very large buffer is required.

    http://www.autoblog.com/2014/06/18/2015-hyundai-tucson-fuel-...

    3. The sources for my ZEV credit info is as follows:

    http://cleantechnica.com/2014/04/23/california-ruling-means-...,

    http://green.autoblog.com/2014/06/04/tucson-hydrogen-fuel-ce...

    Thank you to everyone for commenting and driving a very interesting debate.

  • Report this Comment On June 23, 2014, at 11:03 PM, peteroo wrote:

    DannyS. I get it - you are not a fan of Tesla Motors (TM), the Model S (MS), or BEVs. So what do you propose? If there is a better mousetrap enlighten me. Perhaps Big ICE converting all their gasoline engines to CNG would be a major step forward but it is still not a solution.

    Look at what TM has accomplished in the past 3 years: NUMMI, a functioning production line, trained production staff, sales and service infrastructure (national and international), ramping up MS production, supercharging infrastructure (national and international), preparing for the Model X testing and production, designing Gen III, … Not too bad? How far will Toyota and Honda be in 3 years with their FC cars?

    Last question, what has Big ICE and Big Oil done for you? Tesla offers you free charging from coast to coast (US). Tesla updates their cars to improve performance and features (free WIFI upgrades). Tesla monitors your MS and will inform you that they detect a potential problem. Tesla is prepared to share their patents and technology with any serious manufacturers.

    Danny, forget the stock, look at the company, look at what they are accomplishing. Have you test driven a MS? I am not asking you to get on board but I am asking you to offer constructive criticism not ignorance.

  • Report this Comment On June 24, 2014, at 6:11 PM, AdamGalas wrote:

    Lets not forget the best part of owning a Tesla:

    "even if there's a zombie apocalypse, you'll still be able to travel the country on the Tesla Supercharger network."

    -Elon Musk

    Tesla: How much would you pay for that kind of peace of mind?;)

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