Thursday, August 29, 2013

Tesla Motors (Nasdaq - TSLA) Still Cruising Despite Concerns

It seems nothing can go wrong for Tesla Motors (TSLA $166.00). The stock price has quadrupled since the beginning of the year, even in the face of concerns about the company's ability to manufacture and deliver its Model S, potentially damaging reviews, and several states have banned Tesla from selling the electric cars within their borders. In California, the Model S has outsold other luxury car manufacturers such as Porsche, Jaguar, and Land Rover. The U.S. National Highway Safety Traffic Administration recently gave the car the highest-ever crash safety rating.

There are questions that remain, such as how the car's battery will perform a year or two down the road, and if the battery charging infrastructure that Tesla is installing across the country will be adequate for the car to function as a primary vehicle. CEO Elon Musk is planning to take his sons on a cross-country road trip in the Model S, and charging it only at the company's network of Supercharger stations. The network is growing, but even in the areas with the most charging stations (California and New York/New Jersey), the Superchargers are too few and far between to make using the Model S for everyday activities realistic, much less convenient. The closest Supercharger station is 11.5 miles from my residence. The next closest is 83.5 miles away. I'm not sure exactly how many gas stations are within 11.5 miles from me, but I'd guess it's a few more, at least.

The Superchargers are free to use and solar-powered so the car is operating on zero emissions post-manufacture (mining the lithium used for the battery is not environmentally friendly). Tesla is going to need to drastically expand the Supercharger network to make the upcoming Model X work. It's being marketed to the middle-class, so it most likely will be used by people to commute, bring their kids to activities, etc. Tesla is claiming that by the end of 2014, the network will cover "80% of the U.S. population and parts of Canada," whatever that means.

The Superchargers are only practical for traveling between cities, something the average motorist isn't doing regularly. So an owner would have to plug the car in at home, pay for the electricity to charge the car, and say goodbye to the zero emission claim, since most of the electricity in the U.S. is still produced by fossil fuels. The car itself may not emit greenhouse gases, but the power plant charging it up still does. Also, while the Supercharger can give the battery a 50% charge in 20 minutes, it takes considerably longer to juice up at home or other charging stations. The battery also drains when the car isn't in use, so it has to stay plugged in.

Resale value is another factor that could have an effect on sales moving forward. The Model S hasn't been out long enough for anyone to be sure how well they age. Some studies have estimated that the battery packs in the Roadster, the precursor the Model S, will keep 70-85% of its initial capacity after being charged 300-500 times. Tesla says it should retain about 70% after 50,000 miles. Others have speculated the battery could last 20 years. But there are myriad factors that contribute to battery health, and there isn't enough data available for anyone to know for sure.

What we do know is that the battery packs are expensive, and the secondary market would be impacted if buyers were forced to install a new battery in an old car. But the cost for a new battery has been declining, so it may turn out to not be of great concern.

Potential Model X customers are probably willing to overlook these concerns. Tesla is cool right now. Musk is trending into Steve Jobs territory. The Model S has received rave reviews from publications and owners, and was named the 2013 Motor Trend car of the year. The Model X could be a hit if it can do a good enough job of replicating the experience of driving the Model S while slashing the price tag.

Customers can reserve a Model X for a refundable $5,000 ($40,000 for the "Signature" edition) right now, even though the car isn't expected until late in 2014. And that's just when the first shipment is expected. Someone could leave $5,000 in limbo for a car that takes at least a year and a half to arrive, or, according to Tesla's terms of service, might never arrive. Five-thousand dollars probably isn't a big deal to someone who can afford the more expensive Model S; middle-class families surely would be less inclined. And since the reservation price is fully refundable, those who decide to place an order have a lot of time to decide whether or not they really want to go through with it.

Tesla has been running more smoothly this year than many thought they would. The Model S pushed the company into profitability. It's critical that the Model X succeeds for Tesla to take the next step. A good deal of that success hinges on the company's ability to grow its Supercharger network. Time is working both for and against Musk & co. We'll see if they can pull it off.