With just over a month left in 2014, Tesla Motors (NASDAQ:TSLA) shareholders can look back at another great year, with shares up about 65%. This follows a year when shares jumped more than 300%. But the company's soaring share price is bringing the biggest risks to Tesla's future into greater focus. While there are a number of risk factors facing the company, one of the biggest unknowns remains whether Tesla's mission to accelerate the advent of electric vehicles, even when if it means supporting competitors, will impede on Tesla's fiduciary responsibility to grow shareholder value, or support it.
If there was any doubt that Tesla is breaking the mold set by its larger peers, the company set the record straight in a blog post back in June.
"Yesterday, there was a wall of Tesla patents in the lobby of our Palo Alto headquarters," Tesla CEO Elon Musk wrote. "That is no longer the case. They have been removed, in the spirit of the open source movement, for the advancement of electric vehicle technology."
Tesla announced that it "will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology." Translation: Tesla's patents were now free for use as long as competitors offered something of similar value in return and didn't indulge in foul play, like creating some sort of exact replica of a Tesla vehicle and slap a different logo on it.
While the caveat was definitely noteworthy, the company was still making a clear statement to its automotive peers: We're here to help the industry transition rapidly to electric vehicles, even if it means you're creating ones that are on par with ours.
"Tesla Motors was created to accelerate the advent of sustainable transport," Musk explained in the blog post. "If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal."
A good move for shareholders, or not?
While some critics have argued that Tesla's willingness to work with competitors may impede the company's growth potential, there is a simple opposing argument: The faster competitors join in to support a transition to EVs, the more Tesla will benefit from new charging infrastructure, greater economies of scale in the EV supply chain, and so on.
But it's still a big question mark whether formidable competition in the EV space will support or stall Tesla's efforts to grow intrinsic value for shareholders.
According to comments from Musk in a GQ magazine interview published this week, its open-source approach to patents may not be the best way to build shareholder value.
That wasn't to advantage us. ... It actually disadvantages us. We're still very tiny in the car industry -- this year we might do 32- [to] 33,000 cars out of over 9 million. We're a minnow from a volume perspective, but technologically we're on point. This allows other manufacturers to catch up technologically. ... And that's the whole idea ... it's the goal of Tesla to accelerate the advent of sustainable transport, and I'd rather the other manufacturers would go fully electric as soon as possible.
But Musk does note that there are potential benefits for Tesla from making such a move.
"Open sourcing the patents does have the advantage of making Tesla a more attractive place for the world's best engineers to work," Musk explained in the interview. "And it builds goodwill, which I believe will be important."
But given that competitors have still not introduced any long-range fully electric vehicles to compete in Tesla's space and that the company is only about two years from completing its Gigafactory to bring economies of scale to lithium-ion production, the risk that competitors will join the game in a way that slows Tesla down is beginning to diminish. Even more, Tesla's move to build the Gigafactory to provide batteries for up to 500,000 electric vehicles per year by 2020 will also position the company as a potential supplier of batteries to competitors, further reducing the risk if demand falters for Tesla-branded vehicles.
Still, Tesla's massive $31 billion market capitalization largely prices in smooth sailing in the coming years. So if Tesla's willingness to help competitors turns out to be more of a disadvantage than investors imagine, this big question mark could turn into a negative catalyst for the stock that leads to market underperformance.
Zooming way out, to, perhaps, a 10-year time horizon, I believe that the faster and more meaningful the growth is in the overall electric vehicle market, the better it will be for Tesla stock as the EV market's purest play. So I commend Tesla's efforts to share patents "in good faith." But Tesla's rosy valuation is staring me down with the evil eye ...