There's no doubt that it's a handsome car. But is Tesla's Model S a world-beater or a niche product? That's the $25 billion question. Source: Tesla Motors.
Is Tesla Motors (TSLA 0.88%) really set to completely upend the global auto business? Or has its potential impact (and share price) been blown way out of proportion?
Below, you'll hear both sides from two veteran Fool writers. Representing the bulls is Tesla fan (and Model S owner) Daniel Sparks, and representing the bears (or at least the "skeptics," as he puts it) is John Rosevear. Read what they have to say, and then feel free to join the debate in the comments section below.
Daniel Sparks: Tesla is a winner for investors
"The auto industry is highly competitive, capital intensive, and stricken with unimpressive profit margins. How could Tesla ever succeed?" the bears argued before Tesla launched its Roadster -- an argument that persisted even as Tesla moved to launch its second vehicle, the Model S. But Tesla did succeed. And I contend that the company, over the long haul, will continue to prove the bears wrong.
I see Tesla as a driving force behind a major shift in the final years of the internal combustion engine in an antiquated industry with a history of short-term thinking and little innovation. The soaring sales and long and growing list of accolades for Tesla's Model S offer clear evidence that the value proposition for fully electric cars is far more compelling than the general public realizes. Tesla's execution to date, and its willingness to take unorthodox approaches in every area of its business, suggest the company will remain a leader in this fast-growing segment.
Most important to my thesis for holding Tesla stock for the long term is that I don't view competition as a threat, but as a catalyst: Skepticism toward electric vehicles is Tesla's biggest challenge, and the company actually needs other manufacturers to build fully electric cars in order to combat this skepticism.
Most people have never driven a fully electric car, let alone a Tesla. In fact, with only about 60,000 Model S's on the road globally, most people haven't even talked with someone who owns a Tesla. Yet in the face of such paltry market penetration, Tesla sold about 35,000 Model S units in the U.S. in 2013 and 2014 combined, just short of the 38,579 Mercedes-Benz S-Class (the best-selling comparably priced car in the U.S.) units sold during the same period. The Model S clearly isn't an early adopter, one-time wonder; with the help of other manufacturers going electric and spreading the segment's value proposition, we're talking a superior replacement to the internal combustion engine.
What happens when fully electric competition such as General Motors' (GM 1.44%) upcoming Chevy Bolt begin popping up? Skepticism about electric vehicles will decline and demand will increase. Indeed, the competition might be so beneficial to Tesla that we may soon be comparing sales of its upcoming, lower-cost Model 3 to sales of BMW's 3 Series in the same way we compare Model S sales to sales of Mercedes' S-Class today. Imagine the success an electric vehicle with a lower price tag could achieve relative to the success of the Model S with its $70,000-plus price point. This sort of adoption of electric vehicles will only be possible with increasing endorsements for this new technology from other established automakers. Tesla needs competition.
Sure, other new vehicle technologies might also replace the internal combustion engine, but Tesla's fully electric approach is the only substitute that has proved to have high relative appeal at a particular price point. So instead of speculating about new, unproven technologies, I'll place my bet on the one that is already threatening the renowned Mercedes S-Class.
Unfortunately, most of the upside for Tesla stock is already priced in. While I'm happy to hold the stock at these levels for the long haul, the high stock price has arguably already taken into account not only rising sales of the Model S, but also a successful launch of the Model X and Model 3. As I explained in a previous valuation of Tesla stock, I don't expect high-flying returns from here. However, as I'm impressed with Tesla's execution to date and hopeful the company will ride a wave of huge adoption of electric vehicles, I'm willing to give management a chance to outdo my own expectations.
(It's also worth noting that while there's no room for making a case for this part of Tesla's business here, investors also should not forget about Tesla's planned foray into energy storage.)
John Rosevear: Investors should be very careful with Tesla
To be clear, I'm not a Tesla "bear," exactly -- more a Tesla skeptic. I don't own a Model S like Daniel does, but I've driven several. It's a nice car, and an impressive achievement. And I love the way the company has repeatedly stepped up and delivered on its ambitious business plan.
But I haven't bought the stock. And unless something changes, I won't, because I think the road ahead for Tesla is a whole lot harder than people realize.
My skepticism is based on the company's growth targets, which seem to get more divorced from reality every quarter. Annual sales of 500,000 vehicles by 2020? Millions by 2025? A $700 billion market cap?
Seriously? And yet, as even Tesla fan Daniel acknowledges, much of that hypothetical future growth is already priced into the stock.
Where is all of this growth going to come from?
Daniel talks about how impressive the Model S is, and how many people remain ignorant of its virtues. Fair points. Tesla's more affordable Model 3 is currently set for launch in late 2017, but Musk has warned that it might not be up to full-speed production for a year or more after that. That means much of the automaker's near-term growth depends on the Model S and the similarly-priced Model X.
But how big is the market for electric luxury cars that sell at an average transaction price of about $100,000? As Daniel pointed out, Model S sales already rival sales of Mercedes-Benz's S-Class. Consider that Porsche -- the whole brand -- sold about 190,000 vehicles last year.
It's still not even clear that electric cars of any kind will ever be more than a niche product. Electric cars aren't catching on at anywhere near the rates many analysts expected just a few years ago. According to InsideEVs.com, which tracks sales numbers closely, only about 120,000 "plug-ins" -- plug-in hybrids and battery-electric cars -- were sold in the U.S. last year, and about 320,000 worldwide.
Even factoring in conventional hybrids such as Toyota's Prius, "electrified vehicles" as a category went from 2.3% of the U.S. market in 2008 to 3.3% last year -- even as that segment has gone from 12 entries to 60.
Where will all of Tesla's growth come from? Where are all of these people who are willing and able to spend six figures on an electric car? Isn't it possible that most people who want one already have one?
I can't answer those questions, and that's why I'm a Tesla skeptic. But there are many other reasons to be skeptical of the enthusiasm that has driven Tesla's stock price.
Tesla is still just a tiny player
To hear some Tesla fans tell it, the company is already blowing away its old-guard rivals. Many of the Tesla fans I talk to seem dangerously ignorant of the realities of the global auto business. For a bit of perspective, this chart shows the total 2014 sales of Tesla versus several of the big players.
Source: Automotive News.
Sure, it's cool to think of Tesla as the Silicon Valley underdog taking on the ossified old Goliaths of last century. But that's not the reality: These companies are all spending big bucks on advanced drivetrains and systems of their own. The battery-electric Chevy Bolt, which will deliver 200 miles of range for about $30,000 when it arrives late next year -- a full year ahead of Tesla's Model 3? The hydrogen-fuel-cell-powered Mirai from Toyota? Ford's advanced plug-in hybrids? Daniel's characterization of the incumbent automakers as "an antiquated industry," parroting many ardent Tesla fans, is clearly nonsense. As you can see in that chart, Tesla's old-guard rivals have the sales to support a much higher level of spending, and the global economies of scale to make the most of the money they spend.
Make no mistake: It takes big, big bucks to compete in the global auto business. That's why analysts are taking rumors of an Apple electric car very seriously: There's no doubt Apple, with $178 billion in cash on hand, can spend what it takes to compete. Can Tesla?
On Tesla's most recent earnings call, CEO Elon Musk promised to spend "staggering amounts" of money on capital expenditures. But what does "staggering" mean?
Apparently, it means $1.5 billion in 2015.
I hate to break it to Tesla fans, but that's not exactly big bucks in the auto business. It's probably quite a bit less than Ford just spent on its new F-150 pickup. General Motors spent $7 billion on capital expenditures last year -- and GM isn't trying to expand at Tesla's pace.
Even if a mass-market move toward electric cars gets rolling over the next few years, Tesla might still end up a niche player in the market it helped create. Or put another way, having shown that electric cars could be both cool and useful, it finds itself a small player surrounded by giants that have caught on to the tune Musk and company have been singing.
I suspect that Musk himself would be just fine with that. After all, he would have helped to change the world -- and he has plenty of other things going on to keep him busy.
But I don't think that's the world Tesla investors have signed up for, and its why I haven't joined them.
