In March of this year, Tesla (NASDAQ:TSLA) was trading at $212 when Marketocracy Master Eugene Groysman called the company the Apple (NASDAQ: AAPL) of the auto industry. Since then, Tesla traded as low as $179 and as high as $291. With the stock now at $248, Tesla has given Eugene’s investors an exciting but profitable ride for 4.7% of their portfolios. But, with gasoline prices hitting 4 year lows, it's time to reassess Tesla’s potential to double.
Eugene said that in order to double, Tesla has to make a car that is competitive with luxury gasoline powered cars. For this to happen, the cost of lithium-ion batteries has to come down, dealership markups have to be eliminated, and a nationwide system of charging stations has to be established. Let's take a look at the progress Tesla has made on these three fronts since March.
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Reducing the Cost of Lithium-Ion Batteries
On September 4, 2014, Tesla announced that Nevada was selected as the site of Tesla’s lithium-ion battery gigafactory. The $5 billion factory will reduce the cost of the batteries by 30% starting in 2017 and by 2020 will produce enough batteries annually to power 500,000 Tesla cars. Nevada’s Governor said he expects the factory to have a $100 billion impact on Nevada’s economy over the next 20 years. Texas, Arizona, and New Mexico competed for the gigafactory. Nevada won the gigafactory with a package of incentives worth approximately $1.25 billion.
Eliminating Car Dealership Markups
Another way to make Tesla cars cost competitive with gasoline fueled cars is to eliminate the middle man. Every other car manufacturer that sells in the U.S. does so through car dealerships. These car dealerships are profitable enough that in many states they have become a potent political force. In the U.S., Tesla has stores in 16 states and the District of Columbia where direct sales are allowed. There are five states where all car manufacturers are banned from selling direct: Arizona, Texas, Virginia, Maryland, and New Jersey.
I’ve read the arguments put forward by the automobile dealers associations in New Jersey and Texas that were successful in getting direct sales banned in those states, and frankly they seem exceptionally self-serving. For example, the Wall Street Journal reported that Bill Wolters of the Texas Automobile Dealers Association said he was “worried that GM or Ford might want to offer direct sales as well, cutting perhaps 15% out of the dealer business and putting thousands of business owners under.”
This year Tesla defeated a bill in Minnesota that would have banned direct sales, lost in New Jersey and Texas, and continues to fight in other states. I have yet to find a single politician who voted for these bans who can make a cogent argument as to why banning direct car sales benefits the citizens they represent.
Residents of the states where Tesla is banned from selling direct, can still legally purchase a Tesla. They just have to do it over the internet. Tesla still operates “galleries” in these states where the staff is not allowed to discuss pricing, provide test drives, or refer customers to a store in another state. I fail to see how politicians in these states can reasonably argue that these laws are in their citizens best interests.
Tesla’s battle to eliminate the middleman is going to be fought state by state and they will be opposed everywhere by car dealership associations that have already demonstrated that they can win without putting up any strong arguments about why banning direct cars sales is in anyone else’s best interest.
Building a Nationwide Charging System
At the present time, Tesla has 135 Supercharger stations in North America situated strategically to enable Tesla owners to drive coast to coast along well-traveled highways in the U.S. These Supercharger stations allow Tesla drivers to recharge their cars for free, for life. These stations provide more current than other electric cars can handle, allowing Tesla owners to obtain half a charge in 20 minutes.
The company has an aggressive build out plan. Tesla says that by the end of 2014, 80% of the U.S. population will be covered, and 98% by the end of 2015.
My Take
I do not think the current low price of gasoline is going to affect sales of Tesla’s current Model S. At $70,000, the Model S is after all aimed at a market segment that is not buying the car to save gas money.
However, Elon Musk has said that Tesla’s goal is to produce an electric car that will sell for less than $40,000 by 2017. The gigafactory is going to take them a big part of the way towards this goal. The target market for the $40,000 car will care a lot more about the car’s total cost of ownership, than buyers of the current Model S. Tesla’s supercharger stations offering free recharging is going to compare favorably to the cost of filling a tank with gas, even if gas prices are lower in 2017 than they are now (which by the way I do not think will be the case). I am pessimistic about Tesla being able to eliminate the middleman by winning political battles state by state. Nevertheless, I think Tesla will succeed in selling directly, because Tesla is already proving that buyers are willing to purchase their cars on the internet.
As we get to the end of 2014, I see the investment case laid out by Eugene Groysman in March is pretty much on track.
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Disclosure: I am the portfolio manager for mutual and hedge funds advised byMarketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
