Shares of Silicon Valley electric-car startup Tesla Motors (Nasdaq: TSLA) popped 17% Thursday after an analyst at Morgan Stanley released a glowing 50-page report on the automaker's prospects -- complete with a $70 price target.
Yep, seventy bucks a share. For an "automaker" that has never made a profit, has built (or more accurately, has had someone else build) a grand total of about 2,000 $100k-plus sports cars, and was trading at about a third of that number when the report was released.
And this isn't an April Fools' joke.
Tesla to $70? Seriously?
The folks at Morgan Stanley are already calling Tesla "America's Fourth Automaker" and predicting great things for the company, thanks to a soon-to-be-burgeoning market for electric vehicles and help from giant Toyota (NYSE: TM). In a nutshell, they see electric cars accounting for 5.5% of the global market by 2020 and Tesla accounting for 7.3% of that.
That, in turn, would mean Tesla moving 240,000 vehicles a year and generating annual sales of $9.5 billion, EBITDA of $1.5 billion, and net income of $976 million.
Nine years from now. Maybe.
Do they really have a case? Let's consider the big questions.
Will electric cars sell?
Of course they'll sell, say the smart kids at Morgan, thanks to high oil prices and government support. But oil prices and government incentives are already high, and so far, that's just a thesis. Sure, Tesla's Roadster has sold more than 1,000 copies, but selling a high-priced niche product to well-heeled gadget geeks isn't a proof of concept.
Down here in the mass market, at least so far, evidence is lacking. Through March, Nissan sold a grand total of 452 examples of its electric Leaf in the U.S. General Motors (NYSE: GM) has done better with its Chevy Volt, but the Volt comes with a gasoline engine. And in any case, these are both essentially experimental products, designed to test the waters and introduce the technology. I do think EVs will find a market as ranges go up, prices come down, and the major automakers introduce more mainstream-seeming products. (Ford's Focus Electric, due later this year, will be an interesting test.) But right now, it's far from a slam dunk.
Can Tesla crack the mainstream market?
I've been skeptical about Tesla's chances all along. As I see it, Tesla, as an upstart, needs two things:
- Cars that are as good as everyone else's. I'm not talking about the drivetrain technology here. I'm talking about things like dashboards that don't rattle, doors that don't rust, five-star crash ratings, interior panels that look expensive, infotainment systems that reliably infotain, heaters that work quickly on January mornings in Maine, that sort of thing. Building a car that competes with the world's best is hard -- ask any Chinese carmaker. The upcoming Model S sedan is going to go out the door with price tags in BMW territory. Unlike the Roadster, which is mostly built by other companies, Tesla's building the Model S itself. Will the ownership experience compare?
- Technology that's better. Range is everything in the electric-car business. The near-term Holy Grail is a car that can go 300ish miles without recharging, just as most gasoline-fueled cars can. Right now, today, of products that are actually on the market, only Tesla's is even close to that. This is what people who follow technology companies (but who don't know a lot about car companies) typically hold up as Tesla's disruptive advantage.
But here's the thing about that technology: That's today, and that's with a six-figure product. Range right now is mostly a matter of more expensive batteries.
Can Tesla bring the cost of that advantage down? Probably, eventually. But the major automakers and megasuppliers like Johnson Controls (NYSE: JCI) are investing billions in efforts to move forward as quickly as they can. Tesla's next product, the Model S sedan, isn't expected to ship until late in 2012. Do you think companies like Ford (NYSE: F) and Honda (NYSE: HMC) -- not to mention GM, with its huge Chinese operation, and green-obsessed Toyota -- won't have managed to move the goalposts by then?
Look, what Tesla has already done is undeniably impressive. It's developed and sold an all-electric car that competes directly with the likes of Porsche, and from what I've seen and heard, its customers are for the most part very happy ones. This is a huge achievement, not least because it's extremely hard (and expensive) to develop a car that meets regulatory standards around the world.
But going from a boutique producer of six-figure sports cars to a mass-market manufacturer that can compete on quality and technology and price with the giant global companies that rule this industry -- which is what Tesla will have to do to justify anything like a $70 share price -- is a huge, huge leap. Maybe an improbable one.
I suspect that the crew at Morgan Stanley doesn't quite get that.
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