The Future of Electric Automobiles

 

The Electric Grid Death Spiral
10 Revolutionary Stocks
The Future of Electric Automobiles

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The idea of a death spiral that hits the electric grid goes like this.

As users slowly switch to alternative energy sources (mainly solar), the rate of growth at electric utilities (already in low single digits in most places) will eventually hit zero.

With slowing growth, utilities will have a hard time maintaining the grid—their biggest asset—without raising rates.

But raising rates will encourage more customers to switch to alternative energy, thus accelerating the trend and bringing about the death spiral that leaves electric utilities too poor to maintain the grid.

In the worst scenario, the result is a shrinking customer base that pays more and gets less. Brownouts and blackouts become regular occurrences, and bankruptcies mushroom.

Smart utilities are already working to prevent this scenario by investing in alternative energy themselves, and if the cost of alternative energy declines as they expect, these moves will eventually bring down their average cost, and allow them to continue to serve the vast majority of customers.

But if the electric utilities fail to remain attractive to consumers—if consumers can make their own power cheaper—the long-term result will be a significantly more distributed power infrastructure.

And if it goes all the way, one of my fondest dreams may come true—the disappearance of all those ugly telephone poles and the wires strung on them. (I’m not holding my breath.)

Still, the trend is clear, so it’s appropriate to ask where the opportunities are for investment.

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10 Revolutionary Stocks

Two weeks ago, I laid out the case for investing in SolarCity (SCTY), a company whose goal is to be the biggest electric utility in the U.S., using solar power. The stock is up about 10% since then, thanks to the rebound in oil prices that revived all energy stocks, but that’s a short-term gain that could easily disappear just as fast.

Long-term, however, I feel very optimistic about investing in SCTY.

And I feel equally optimistic about a company that’s closely affiliated with SolarCity in several ways, Tesla Motors (TSLA).

Now, admittedly, neither of these companies is well respected yet. Both are still relatively young, with larger competitors who might steamroll them given the opportunity. But that’s what investing in revolutionary stocks is all about.

If you wait until the future is certain, you can miss the best part of a stock’s advance!

Remember the way things were in the early days of Amazon, or Apple, or Netflix or Google?

When each of those companies was young, there was a great deal of uncertainty.

But early investors (if they managed to hold on for the long-term) made a killing.

My goal with these 10 Revolutionary Stocks is to highlight stocks with similar profit potential—companies that have the potential to change the world.

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Revolutionary Stocks #9: Tesla Motors (TSLA)

Tesla’s goal is big—to be the leading force in the movement to obsolete the internal combustion automobile.

Most people don’t think that big, but Tesla CEO Elon Musk does—and I like his vision. Just as SolarCity might eventually bring a future without telephone poles, Tesla might bring a future without automotive emissions, and without automotive noise. Imagine how much more pleasant our cities would be then!

Tesla started by selling 2,500 two-seat Roadsters, which cost roughly $125,000. They were manufactured by buying Lotus “gliders”—bodies without engines—and adding Tesla’s batteries and motors.

Those roadsters, plus an IPO, yielded enough cash (and consumer interest) to build a factory to build the Model S sedan, which seats five adults and has a base price of $65,000. To date, the company has sold more than 60,000 of these highly rated vehicles. (I received mine in September, 2013, not long before the Model S was named 2013 "Motor Trend Car of the Year," the 2013 "World Green Car," and Automobile Magazine's 2013 "Car of the Year," and I’ve driven it more than 18,000 miles since.)

Coming this fall is the company’s SUV, named Model X, which will use the same platform as the Model S and have a similar price structure. Since SUVs now outsell sedans in the U.S., the company should sell a ton of these.

And coming a few years later will be the “affordable” sedan, roughly 20% smaller than the Model S and priced at roughly $35,000 to start. This car will aim squarely at BMW’s Model 3, Audi’s A4 and Mercedes’ C-Class.

What Else Tesla Does Differently

The fact that it makes electric cars is far from the only thing that makes Tesla different.

It makes its cars in California, not Detroit.

It builds each car to customer specifications; there is no inventory.

Each car sells for list price; there is no bargaining.

Each car is sold directly from Tesla to the customer; there are no dealers.

Service centers operate with a goal of satisfying the customer, not maximizing profit. In fact, Elon Musk has said that service should not be a profit center.

The company does not play the game of model “years” as traditional manufacturers do. It just keeps making its cars better.

The company does no advertising. With a backlog of several months for the Model S (and at least 16,000 Model X orders), there’s no need. (GM, Ford, Toyota and Fiat Chrysler all spend about $2 billion a year on advertising.)

In short, Tesla is working on revolutionizing the automobile industry in many ways beyond replacing the internal combustion engine.

Driving on Electric Power

The Model S has an enormous 17” touch-screen display in the center of the dashboard that controls all the car’s functions. Software updates arrive via Wi-Fi and are installed automatically, at night, while the car is plugged in. I call this unit the brain.

But the heart of the car is its powertrain, the battery-motor combination that allows the car to out-accelerate almost every other car on the road—silently. (The Internet is full of videos of Teslas drag-racing exotic cars.)

Yet this powertrain is so efficient that the EPA gives the car a rating of 89 miles per gallon (equivalent)!

And the most common battery pack (85 kWh) is so big that it’s able to power the car 265 miles on one charge.

The car requires almost no maintenance (the only fluid that needs occasional attention is windshield washer fluid).

It emits no exhaust, makes almost no noise, and has no vibration.

Furthermore, lifting your foot off the accelerator turns the motor into a generator, which slows the car down as energy is returned to the battery. As a result, the Model S taxes its brakes far less than other cars as drivers enjoy one-foot driving.

Supercharger Network

Most Tesla owners recharge by plugging in overnight, ideally in a garage. It becomes a habit, just like plugging in your phone at night. You never, ever need to take time to refuel at a gas station.

For extended trips, Tesla’s Supercharger network, which provides free charging to all owners, enables uninterrupted travel across the country. Today, there are 373 Supercharger stations around the world (61 are in China) with 2,022 Superchargers—and many more on the way. You can see the details here http://www.teslamotors.com/supercharger

Interestingly, BMW and VW recently announced that they’d collaborate in building a network of charging station for electric vehicles on both the east and west coast of the U.S.

The Gigafactory

Current Teslas are powered by standard lithium ion batteries made by Panasonic—the same batteries that power laptop computers. It takes more than 7,000 batteries to power a Model S.

But Tesla is building a Gigafactory in Nevada, just over the border from California. It will be the biggest battery factory in the world, and will drive costs of the batteries down as volumes grow. Panasonic is a partner, and this factory will give Tesla a major cost advantage over all other electric car manufacturers.

Furthermore, these batteries will be available to partner SolarCity as energy storage systems (call it a household backup battery) for solar power customers.

In the ideal arrangement, a rooftop solar array charges both the car and the household backup battery, in some cases yielding true independence from the grid.

Note: the other connection between SolarCity and Tesla Motors is that Elon Musk is the Chairman of SolarCity and that its CEO (Lyndon Rive) and CTO (Peter Rive) are his cousins.

The Competition

The Toyota Prius was a game-changer; it proved to people that hybrid cars were practical.

But hybrids are only a halfway solution, as they still have all the maintenance requirements—and all the mechanical complexity—of a gasoline-powered vehicle.

Most existing manufacturers have been taking baby steps into the electric car business, but many are doing it only because of government incentives. None of them are committed whole-heartedly to it like Tesla. And this is understandable! When your bread-and-butter is gasoline-powered cars, there’s a real reluctance to move beyond that, to abandon—or even compete with—your current investment.

Furthermore, you can count on the lobbying power of the industry leaders to ensure that their legacy systems are not threatened too quickly by the switch to electric.

Still, the industry is making progress! The Nissan Leaf has been the volume leader in the pure electric space in recent years. Other early entrants include the pure electric Ford Focus, BMW i3, Mitsubishi i-MiEV, Fiat 500e, Volkswagen e-Golf, Chevrolet Spark EV, Smart Fortwo electric drive.

As a group, these cars are encouraging; they’re small steps toward Elon Musk’s goal of making the internal combustion automobile obsolete.

But none can be viewed as competitors of Tesla today. On the horizon are bigger, higher-powered vehicles from Audi, BMW and Mercedes that aim to be more competitive with Tesla, but they’re still a few years away.

Hydrogen

Not everyone believes the future is electric. Toyota, the biggest car manufacturer in the world, is betting on hydrogen fuel cells. Not only that, it’s got the backing of the Japanese government, which has committed to buying 1,500 fuel cell vehicles from Toyota, and will support the build-out of a network of self-service hydrogen stations.

Reacting to those developments, Elon Musk called hydrogen fuel cells "extremely silly," and outright dangerous, saying, "It has extremely low density, it's invisible, you can't even tell if it's leaking, it's extremely flammable. Hydrogen is an extremely dumb [energy source] to pick. You might as well pick methane."

How this unfolds will be interesting to watch. Assuming Musk is right, will politics trump science?

Finance

Tesla Motors sold $75 million of cars in 2011, $102 million in 2012 and $387 million in 2013—impressive growth. Plus, the company has been profitable every quarter since the first quarter of 2013. Results for the fourth quarter and full year of 2014 will be announced Wednesday, February 11, after the market close.

Valuation

As I write, Tesla has 12-month revenues of $2.86 billion and a market capitalization of $27.3 billion. Its PE ratio is 376, which is high by anyone’s yardstick.

But that’s normal for revolutionary companies that have a major impact. And looking at expected earnings, the PE ratio is “just” 80.

The Chart

TSLA went public in June 2010 and motored very slowly higher until the first quarter of 2013, when news of its first operating profit lit a fire under the stock. The ensuing run took it all the way from 38 to 291 (September 2014) and since then the stock has been correcting normally. In brief, you might say the value of the stock has been slowly declining while the value of the company has continued to increase rapidly. From here, there’s support at 190 and 180—and at 120.

At some point, buyers will conclude that the stock is cheap enough—or that the growth prospects have improved too much to ignore—and the stock will resume its long-term uptrend. Perhaps it already has.

Conclusion

One of the most important lessons I’ve learned is that you should never fall in love with a stock—that you should always practice diversification and sensible portfolio management.

That said, I admit that I—like many Tesla owners—love my car. Furthermore, I—like many other people—think Elon Musk is an awesome manager, and that his company is very likely to continue to have great success as it works to end the era of the internal combustion-powered automobile.

But the car is not the company or the stock. Investor perception is a key factor in investing that should never be ignored. If oil prices continue to remain low, and traditional manufacturers continue to sell plenty of gasoline-powered cars, investors may perceive that the electric car revolution will be pushed further out.

Or maybe the hydrogen movement that Toyota is behind will gain traction. Stranger things have happened.

Today, TSLA’s chart action argues against buying; there are plenty of more attractive charts out there. But long-term, I remain very bullish on the stock, and I’ve been telling readers of my Cabot Stock of the Month who own the stock to sit tight. Of course, they originally bought way back in December 2011, when the stock was trading at 29, so they’re sitting on a nice profit of 655%.

But I think there are even bigger profits ahead!

So, you could simply take the plunge and buy TSLA here. You could wait for further signs of strength from the stock. Or, better yet, you could become a regular reader of Cabot Stock of the Month, where I’ll update you on my thoughts on TSLA every week, as well as recommend another great stock to you every month, and tell you exactly how to play it.

For details click here

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Chief Analyst of Cabot Stock of the Month
Publisher, Cabot Wealth Advisory

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Timothy Lutts can be found on Google Plus.

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