While Tesla's (NASDAQ: TSLA) Model S is often compared to other electric vehicles, or EVs, the company insists it doesn't compete in this category. While the assertion may raise eyebrows, it actually makes sense. Even more, the idea that Tesla isn't competing with EVs is a great point for the bullish case for Tesla stock.
Who does Tesla compete with, then?
"We don't compete with EVs," said Tesla vice president of corporate and business development Diarmuid O'Connel at the auto show in Detroit last week. The Model S "was designed to compete with other vehicles in its class such as the BMW 5 series or the Mercedes E-Class or S-Class," O'Connel said. Even now that it is going into China, the company doesn't see the Chinese electric-car maker BYD as a competitor.
For Tesla investors, this is good news. The market for cars in this class is very large. Here are the 2013 global sales for each of the three models O'Connel alluded to:
- BMW 5 Series: 366,992
- Mercedes-Benz E-Class: 242,562
- Mercedes-Benz S-Class: The "best-selling luxury sedan in the world," according to a Mercedes-Benz press release.
If Tesla's addressable market were just EVs, investors couldn't expect the rapid growth its stock is priced for. There have only been a bit over 200,000 EVs sold globally -- ever.
But Tesla's belief that it doesn't compete with other EVs goes further than the fact that it doesn't view current EV models as direct competition; chances are Tesla wouldn't feel threatened if a manufacturer did launch an electric vehicle in the same space. Tesla CEO Elon Musk told CNNMoney in April that he hopes Tesla is surrounded by electric cars from other manufacturers in the future. More electric cars on the road, he reasons, would accelerate the advent of mass adoption of electric vehicles.
"I really look forward to the day when every car on the road is electric. That's the goal," Musk told CNN Money. It's this desire that's key for Tesla investors to understand. Tesla is essentially positioned to actually benefit from competition from EVs, thus lowering the risk for Tesla's growth trajectory to disappoint in the future.
Where are EVs headed?
If Tesla doesn't compete with EVs, and the arrival of EVs essentially benefits Tesla's potential, then Tesla's opportunity can be somewhat aligned with macro expectations for EVs. But expecting Tesla to only grow in line with the EV market might also be underestimating Tesla's potential, since Tesla has proven to effectively compete with non-EVs, too. In Tesla's very first full year of Model S sales, for instance, the company snapped up more than 8% of the luxury passenger-car sales in the U.S. Imagine if the same effect occurs when Tesla launches its affordable car in 2016 or 2017.
So these assumptions bring us to the question: Where do you think EVs are headed? If you think they will take a meaningful share of the future automotive market, Tesla is probably an excellent holding for your portfolio -- even with a $21.8 billion market capitalization.
Not so bullish on EVs? Tesla stock probably isn't your best bet, then.