Tesla Motors Inc (TSLA): Can It Go the Distance?

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Tesla Motors Inc (NASDAQ:TSLA) is a disruptive company on the verge of changing the automobile industry.  A disruptive innovation creates a new market and disrupts an existing market.  We’ve seen disruptive innovations come from, now, big companies such as Apple Inc. (NASDAQ:AAPL) with music and apps, Amazon.com, Inc. (NASDAQ:AMZN) with home shopping, and Netflix, Inc. (NASDAQ:NFLX) with watching movies.  Now we are seeing this happen with Tesla and their battery electric vehicles (BEVs).  Does Tesla have what it takes to flourish in this new market?  We will explore both the positives and the negatives Tesla will face going forward.

In 2008, the company launched its first model, the Tesla Motors Inc (NASDAQ:TSLA) Roadster, becoming the only highway capable electric car.  The Tesla Roadster was built on the Lotus platform and that deal has since been discontinued, but the innovation didn’t stop for Tesla.  In 2012, Tesla released the Model S which has been the flagship for battery electric vehicles.

The positives behind Tesla

Tesla Motors Inc (NASDAQ:TSLA)Selling cars is not the only business Tesla Motors Inc (NASDAQ:TSLA) is performing in.  Tesla leads the way in the battery car department and currently has deals with Daimler and Toyota producing equipment to build the Smart Fortwo and Toyota Rav4. On top of deals with other automobile companies, Tesla is also a supplier of electric train components such as batteries, chargers, motors, and power management systems.  Granted only a small percentage of Tesla’s revenue comes from these avenues.  In 2012, revenue from the train components was at $31.4 million compared to Tesla’s total $413 million in revenue for the year.  Tesla’s development of BEV’s gave them the edge and ability to partner with Toyota and Daimler.  As other automobile companies begin to develop their own BEV’s, Tesla’s partnerships will come to an end.

The more exciting news for Tesla Motors Inc (NASDAQ:TSLA) is the release of the Model X in 2014. Tesla has a production target between 10,000 – 15,000 cars a year.  Right now cost projections have the Model X starting at $50,000, like the Model S, with the high side being $100,000.  Gross profit margins are targeted at 20% on debut and rising to 25%.

The Gen III is going to be Tesla Motors Inc (NASDAQ:TSLA)’s next model debut in 2016.  This should be the “economy” model at a more affordable price.  Projections have the cost of the Gen III at $30,000 – 60,000.  The Gen III will be a great addition to the market if it does remain affordable.  Right now the Models S and projected Model X top $80,000 – $100,000 for a bigger battery and some add-ons.  The Gen III release should be highly anticipated by consumers and investors.  An affordable Tesla will allow it to steal the market share away from Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM).  GM has just cut the price of the Volt by knocking off $5,000 from the sticker.  Ford has already done the same taking $4,000 of its Focus’ sticker price.  Tesla already has the technology to create a more efficient electric car.  Currently the GM Volt only gets 38 miles on a charge without using gas.  Currently, the 60 kWh battery, Tesla’s smallest, is capable of 200 miles on a single charge.

When the Tesla Motors Inc (NASDAQ:TSLA) Roadster first debuted battery costs were at $680 per kWh. During the Roadster’s life battery cost had already dropped to $480 per kWh.  Further R&D and technology advances will continue to drop battery price and increase profit margins.

Economies of scale will come into play as Tesla Motors Inc (NASDAQ:TSLA)’s production increases. Economies of scale allow for fixed cost and production to be utilized over a greater quantity of products thus driving down overall cost.  Tesla has already spent money in 2010 and 2011 expanding their plant and automation.  Their factory space is already large enough to handle the increased production from the new line of cars going to debut. Currently Tesla is using 126 acres of their factory out of 370 acres.  At not even half the space utilized Tesla will be able to scale up production on the Model S, Model X, and Gen III without production constraints.

Elon Musk has already laid out a plan to build charging stations across the United States.  This has been the major complaint of an electric-only car. Tesla Motors Inc (NASDAQ:TSLA) may be a bit ahead of their time here, but they are fixing that with charging stations and replaceable battery packs.  In the summer of 2013 they will have 27 charging stations set up.  By 2014 charging stations should cover 80% of the United States population.

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