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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Tesla Falling Out Of Favor With Investors

Tesla Falling Out Of Favor With Investors

Elon Musk is a genius and a visionary who is almost single handedly changing the future of mankind through three different industries at once. With that said, it’s not clear if investors can easily benefit from any of that.

Tesla, the company most associated with Musk is in a downward stock spiral over the last month which has taken it to new 52 week lows. There are many reasons for that downward spiral including concerns about market valuations and weak oil prices (which make Tesla’s correspondingly less attractive as a substitute versus conventional cars). But for the first time, Tesla is also facing a new threat that may be frightening away some investors; competition in the electric car space.

Tesla has been the only real electric car maker since its inception as a company. It’s true that Nissan offers the Nissan Leaf, an all electric car, but that vehicle only gets around a 100 miles of range, compared with 270 miles for a Tesla. For the many Americans that drive 50 miles each way to work or who sit in traffic at rush hour, a 100-mile range is simply too perilously close to running out of power for comfort. As a result, the Nissan Leaf has never really caught on with more than a sliver of the population.

Related: Despite Huge Losses Oil Companies Reluctant To Shut In Production

To be fair of course, Tesla is still very much a niche car company. The firm produced about 50,000 vehicles in 2015 and it might make as many as 80,000-90,000 in 2016. Production is really the biggest issue right now for Tesla as it is quickly selling every car it can produce. And that is why investors have been comfortable with the story and given Tesla a stratospheric valuation compared with traditional car companies. Simply put, Tesla is making a cool car that nearly everyone would like to buy and it is selling product as fast as it can produce it. Unfortunately for most people, Tesla’s cars are too expensive so far. Tesla is promising to start production on its much vaunted Model 3 in 2017, but it is very possible that production will end up getting pushed back. Related: Japan And Iran Could Keep a Lid On Oil Price Rally

The Model 3 is particularly important because it is supposed to be Tesla’s first mass market car with a stick price around $35,000. It’s unclear if Tesla really needs to produce the Model 3 – after all Ferrari and Porsche have long had great businesses despite selling only luxury sports cars.  Yet the Model 3 represents Tesla’s chance to grab a large slice of the American car market and become a true competitor in that space. That is, as long as someone else doesn’t get there first – and therein lies the problem and perhaps the reason for Tesla’s sharp share price decline in recent weeks. Related: Why U.S. Shale Is Not Capitulating Yet

It now appears that General Motors rather than Tesla will be the first company out with a tractable mass market electric vehicle. The Chevy Bolt is set to start production by the end of 2016 with a sticker price of around $30,000 (after $7,500 in Federal rebates and incentives) and a range of roughly 200 miles. While that range is still not as high as Tesla’s range, the sticker price is a lot lower. Moreover, GM has the capacity to make hundreds of thousands of cars if the demand materializes. That prospect has to be making Tesla nervous.

For all of Elon Musk’s remarkable achievements with Tesla, the company is still very much an upstart. Making cars en masse is difficult, and the General Motors and Fords of the world have been doing it for a long time. Tesla’s biggest advantage was the lumbering nature of traditional automakers and their difficulty in producing a truly revolutionary new vehicle. Only time will tell if GM has succeeded on that front, but for the first time it does look like Tesla might face some real competition.

By Michael McDonald of Oilprice.com

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Leave a comment
  • Jean DeCaen on February 07 2016 said:
    The Tesla model 3 should actually be cheaper than the Bolt since its 35000 dollar sticker price does not include the 7500 dollar rebate.
  • DARELL on February 07 2016 said:
    >> For the many Americans that drive 50 miles each way to work or who sit in traffic at rush hour, a 100-mile range is simply too perilously close to running out of power for comfort.
  • Tom on February 07 2016 said:
    How does GM have the capacity to build hundreds of thousands of *electric* cars? Assembling vehicles made of imported parts is one thing. Finding someone with the capacity to supply hundreds of thousands of battery packs of that size is quite another. To do that, you would pretty much need a gigafactory or two.

    Also, Tesla has the best battery of anyone. That certainly includes the Leaf. Tesla treat their packs extremely well. What are the odds GM will put so much effort into designed in longevity? That is not what they are known for, to say the least.

    I'd be more worried about Nissan and Toyota but for the supercharger network....

    Tesla isn't a guaranteed win, to say the least, but they appear to have the best shot at mainstream electric vehicles. We'll see.
  • PRada on February 08 2016 said:
    "GM has the capacity to make hundreds of thousands of cars if the demand materializes."

    GM has capacity to massproduce conventional cars, that is true. But GM lacks any capacity to massproduce batteries for electric cars. Li Battery is the most important part of electric car. Without battery electric cars are pretty useless. Thats why Tesla is building Gigafactory.
  • Bull Institute on February 08 2016 said:
    @darell true that ! Tesla cars are just like any other car at the end of the day.
  • richard343 on February 08 2016 said:
    Elon Musk, Consumer Reports and the press's hype made Tesla what it is today. I for one was never impress with the so call innovations of the Tesla company. The Tesla company used the GM skateboard design of the ninety's and with about 7000 Panasonic laptop batteries created an EV. Really, that's not what I call innovation. Then, along with much hype from Elon Musk and Wall Street it has survived these years without making a profit....Just a little company who builds less cars in a year then Toyota builds in one day.
    Elon Musk made fun of it's competition and at the same time welcomed more competition. Not a smart or genuine thing to say for a genius.

  • jack on February 08 2016 said:
    Getting sick and tired of hearing 'federal rebates and incentives.'

    Aren't you?
  • Russian Jew on February 08 2016 said:
    Tesla is a toy factory masquerading for breakthrough inventors.
  • dandanthedrivingman on February 08 2016 said:
    Ever heard of BYD, of China ? The largest electric car/bus manufacturing company in the history of the world? What does a cab driver in St Louis, MO. with over 2+ million Miles driving experience suggest.
    Tell your auto mechanic you have a problem with your Car, you opened the hood, and you cant find the ENGINE....!
  • HenryC on February 09 2016 said:
    The Telsa is only worthwhile with subsidies. Even then it is a pain to recharge on trips. It is basically commuter only.

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