News Analysis date published New: 
Tuesday, December 11, 2012 - 14:30
New Date created: 
Tuesday, December 11, 2012 - 14:30
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Tuesday, December 11, 2012 - 14:30

Before You Buy the "Apple of Cars" Stock, Read This

Tuesday, December 11, 2012 - 2:30pm

Auto entrepreneurs Preston Tucker, John Dolorean and Malcolm Bricklin learned a very tough lesson years ago. You can beat the big automakers at their own game with compelling designs and clever engineering. But your businesses will fail anyway. The amount of resources needed to compete in this capital-intensive business is just too large for smaller car companies to survive. All three of these men finally ran out of cash and had to close shop.

Fast forward to 2012, and an up-and-coming company -- Tesla Motors (Nasdaq: TSLA) -- isn't just surviving, but thriving. The company's Model S sedan has just won the Motor Trend "Car of the Year" award and Automobile magazine's "Automobile of the year" award.

Yet if you dig deeper, as I'll be doing in this two-part article, then you'll find a remarkable company that could fundamentally change the way we think of cars and driving in general. But is the company worth investing in? Before I get into that, let's understand why this is truly a story of resilience and innovation...

Silicon Valley in its DNA
Launched in 2008, Tesla's first model -- the Roadster -- is an all-electric sports car with a range of 245 miles per charge and the ability to accelerate from zero to 60 mph in four seconds. Yet it's the Model S, which was launched this past June, that represents the first "ground-up" effort and is truly the showcase for the company's engineering and product development efforts. Virtually every aspect of car has been rethought from the traditional norms of vehicle design, and this isn't simply a traditional car with an electric motor. From the chassis and the interior to the body, this vehicle could have easily been produced by engineers from Apple (Nasdaq: AAPL). It's that different and it's that good, according to the auto enthusiasts and magazines. Indeed, the company's Silicon Valley headquarters emphasize the distance from Detroit and other traditional auto industry hubs.

Even the Model S' dashboard, which features a massive 17-inch touch screen, looks like it was designed by a consumer-electronics firm.

Tesla has sought to rewrite the auto industry playbook in other ways, too:

  • It owns a network of 31 dealerships, so it can capture retail rather than wholesale prices for its vehicles.
  • Tesla repurposed an old GM/Toyota plant for less than $100 million, compared to the nearly $1 billion that a new plant would have cost.
  • This plant avoids the use of overhead conveyors to move partially-built vehicles down the line, saving millions of dollars in tooling costs.
  • Each factory floor robot conducts five separate tasks, slicing millions more in capital costs.

Yet it's the performance of this car that may have really set the industry on its head. "The crazy speed builds silently and then pulls back the edges of your face," wrote Automobile magazine's David Zenlea. There is instant power in the high-performance version of this car, pushing a sporty 443 pound-feet of torque at zero RPM, unlike most gas engines which don't begin to build power until around 2,000 RPM. In comparison, a 2013 Chevy Camaro SS offers 420 pound-feet-torque, putting the Tesla S Performance model in the same group of American muscle cars.

Tesla S Signature model: 0 to 100 MPH in Under 10 Seconds

In a nutshell, we can now say that an electric-powered car is capable of speeds that most street-legal, gas-engine cars under $100,000 could only hope for. And the fact that this Tesla sedan gets the equivalent of more than 100 miles to the gallon (on a comparable electricity-usage basis) makes this power-plant comparison a non-starter.

Electrics are the future
While all-electric vehicles such as the Chevy Volt and the Nissan Leaf have seen underwhelming initial demand, the core technology is quickly improving. Within a few years, an increasing number of vehicles will be able to drive 200 miles or more before needing a recharge. And most vehicles will be able to take a quick partial charge that boosts range by 50 miles at a series of soon-to-be-deployed charging stations that will soon dot the U.S. landscape. In effect, the era of "range anxiety" that has constrained electric vehicle sales will soon be coming to an end.

Electric vehicles will reach an industry inflection point when their construction costs finally drop to the level where they are competitive with combustion-powered engines. That will happen -- perhaps in five years -- thanks to Moore's Law, the idea that a technology's performance or capabilities doubles every two years. But for now, many automakers have actually found it more cost effective to straddle the fence by combining an electric motor with a combustion engine to create hybrid models. Indeed, that's the approach every automaker in the world is taking. They have all concluded that they can't sell enough all-electric cars at a price that yields profits -- except for Tesla.

Yet here's where the Tesla story gets tricky: The base Model S Sedan starts at $55,000, but the performance version, which is what will likely see the greatest demand in the near future, starts at roughly $80,000. You can also expect similar pricing for the Model X SUV, which will launch in 2014 on the same platform as the Model S.

Problem is, $80,000 vehicles can only appeal to a select group of consumers and many of them have a long track record with other premium brands such as Porsche, BMW, Mercedes, Jaguar and the like.

Not only are these companies working hard on their own paths to electric/hybrid product lines, but they possess some weapons that Tesla will simply never have.

Action to Take --> Tesla has definitely found its place in the sun. By building the next generation of vehicles that are getting industrywide raves, the car company has not only been able to survive during the downturn, but it has done so while launching new products.

And though this has become a great story, it's not reason to go buy the stock. In part two of this article, I'll look at the considerable hurdles that remain in place for Tesla, and why the company --and its stock -- should be looked at in a very different light. Investors would be wise to take note.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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