26 February 2015
3 min read

With the recent arrival of the first all-electric Tesla Model S car in Australia it’s a great time to ask whether Tesla (Nasdaq:TSLA) is a good investment.

Big things are expected of Tesla: its cars have won numerous awards, it’s building an impressive network of charging stations across the US and now Australia. The company has also gained A-list celebrity followers Brad Pitt and George Clooney.

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The most basic Model S sold in Australia starts at over $101,000 but it’s not just the cars that are expensive. Tesla’s share price was US$206.66 as at 10 January 2015, giving a market cap of US$25.91 billion – a massive figure for a car manufacturer that was only targeting 35,000 global deliveries last year.

The hefty price represents a leap of faith that Tesla can reach its ambitious longer term goals, including penetrating the mass market and shipping 500,000 cars a year by 2020. But even Tesla chief executive Elon Musk suggested tapping the brakes on the lofty share price in September last year, saying the share price was “kind of high”. And in January, he told an industry gathering in Detroit that the company wouldn’t be profitable under generally accepted accounting principles until 2020.

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The stock is currently “priced to perfection”, which means the company would need to execute its plans to the letter to justify its current share price.

While 500,000 deliveries a year by 2020 would come closer to justifying the current stock price, it’s a big leap for a company still in its infancy. Even one of Tesla’s most vocal supporters, US bank Morgan Stanley, has recently expressed doubt whether that number will be attainable.

The stock is currently “priced to perfection”, which means the company would need to execute its plans to the letter to justify its current share price.

Competitors not asleep at the wheel

While some may argue that Tesla has the potential to push forward and dominate its category, much like Apple did with the iPod and the iPhone, it would appear that Tesla’s competitors are going to be much quicker to offer strong alternative products.

Apple had its own way for a while before Samsung put up a strong challenge, and now cheaper Chinese manufacturers are compromising the profits of both.

That cycle may happen a lot faster in the electric vehicles market. For example, BMW recently introduced two fully electric cars (the i3 in May 2014 and the i8 in August 2014) and is already challenging Tesla in the US (see chart below) with more models due this year.

Meanwhile, General Motors is desperate to see Tesla in its rear-view mirror and plans to introduce a next-gen Chevrolet Volt later this year. The Volt will not only carry five passengers but also travel 80km on a full charge before switching to petrol – which is some 30% further than the current model. Hot on their heels is the Chevrolet Bolt – it’ll launch in 2017 and boast a range of 320km on a single charge. Other automakers with electric or plug-in hybrid electric vehicles on the horizon in 2015 are Audi, VW, Volvo, Daimler and Mitsubishi.

Impervious to falling oil price

The good news for all manufacturers is that total sales of electric vehicles (i.e. full electric and plug-in electric cars, excluding hybrids like Toyota’s Prius) have seen steadily increasing sales despite the substantial fall in petrol prices from US$3.89 a gallon in April 2014 to around US$2.50 in January 2015.

Research firm Stifel reports that American sales of electric, plug-in hybrids and Prius-type hybrids “held up surprisingly well” in December 2014, despite petrol prices continuing to fall in that month. This all counters the widely held view that electric vehicle sales would collapse with the oil price.

Tesla’s stock price to date has been fuelled by a heady mixture of charismatic CEO, exciting technology and environmental credentials. But when even the company boss expresses concern at the giddy heights its shares have reached, and at a time when the innovation cycle is faster than ever before, it might be wise to diversify any investments in electric and hybrid cars.