During April 2017, former Chair of General Motors (GM) Bob Lutz repeatedly stated on CNBC that he believes Tesla is on the verge of failing and in his words is “doomed to fail.” I could not disagree more. Here are five reasons why I think this former combustion engine titan from General Motors is wrong.
- Bob Lutz has his head in the sand and has no idea what the new car buyer wants today. If GM had their way, they never would have developed an electric vehicle. The only reason they are doing so today is that they have to in order not to lose market share to Tesla. Fact: over 400,000 people gave a $1,000 deposit to Tesla to pre-order the Tesla Model 3 (today, we believe that pre-orders for the Model 3 exceeds 500,000). If GM produced an attractive high performing electric car, they could have also attracted hundreds of thousands of customers. Further evidence that consumers want a fossil free automobile is the success of the Toyota Prius (a Hybrid). For over twenty years, Prius has sold over 10 million vehicles. Demand for electric vehicles is large today. Demand will be high for good electric vehicles that offer an enjoyable driving experience.
- Contrary to what Bob Lutz believes, the business model for an electric vehicle is much better than the business model for a combustion engine. Why? A Tesla electric vehicle has less than 100 moving parts compared to 2,000 moving parts required for a combustion engine. This means building an electric vehicle is easier and more profitable to manufacture. Tesla’s gross margins are far higher than GM, the GM F Platform and Fiat (Tesla GM = 23% versus F GM = 10%). We believe Tesla may be able to produce 10 percent net margins – this is more than double the average of GM, F and Fiat, in good times.
- It is not fully appreciated, but the energy efficiency of electric motors may be four times more efficient than a combustion engine automobile. When you are sitting at a stop sign in traffic or idling in your driveway, you are consuming fuels continuously. The electric motor is simply in ‘hold mode’ during these times. Consumers are ready for and are actively seeking more efficient alternatives, such as the electric motor.
- The inertia and resistance to change within the established automobile companies is very high. They like making cars that consume gasoline. They are not comfortable developing a new platform. First mover advantage may be high because the competition is not serious about electric vehicles. They likely assigned their new young engineers to this project and let their combustion engine engineers run the show – a big mistake design wise. I believe Tesla engineers have a three year technical lead on competitors.
- The potential market for electric vehicles is quite large. With 80 million cars sold globally each year, if just 10-15% converts to an electric platform, this means 8 to12 million electric cars could be sold per year. Furthermore, Tesla has other businesses including the Tesla storage battery and the Tesla Solar City divisions. These complementary business lines may connect well down the road to customers who want to use the sun to power their automobiles. We have not considered any value for these businesses in justifying our belief that the stock is reasonably valued.
What is Tesla stock worth today?
Tesla, Inc. (TSLA) I believe Tesla may come close to its goal of 500,000 cars in 2018. The electric vehicle is a much more profitable to manufacture and we expect higher margins for it than for Ford and GM. I believe Tesla’s revenue in 2018 could exceed $25 billion—up 150% from the current run rate. 2020 sales could exceed the company’s market cap of $48 Billion – 1 million cars with average selling price of $48,000. EPS could be 10% margin or $30 EPS. With a 25 multiple, Tesla could sell at $750 per share in 2019 or 150% higher than today.
This report is not a complete analysis of every material fact respecting any company, industry or security. The opinions expressed here reflect the judgment of the author at this date and is subject to change without notice. Information has been obtained from sources believed to be reliable, but is not guaranteed. Cabot Wealth Management, and/or its officers, directors, employees or members of their families and investment portfolios managed by the firm may have an interest in the securities mentioned in this report, and may purchase or sell while this report is in circulation.