Wednesday, 15 May 2013 09:00 AM
Tesla Motors Inc. (NASDAQ: TSLA) has appeared a lot in the media over the past couple weeks after reporting an $11.2 million Q1 profit. Sales of its Model S sedan outpaced even its own optimistic projections, with the company now expecting to sell about 21,000 sedans this year, while a move into the European and Asian markets could further boost those figures.
Wall Street’s Skepticism
Wall Street has been largely skeptical of electric vehicles, given their high cost to consumers, limited range on a single charge, and a lack of infrastructure for recharging on the road. Over the past few years, many of these issues have been quietly resolved with increasing government incentives, as well as greatly improved battery storage and drive train technologies.
But, these factors weren’t enough to help many companies in the space. Battery maker A123 Systems’ shares consistently declined until a Chinese buyer scooped it up at a steep discount in bankruptcy, while electric vehicle manufacturer Coda actually ended up filing for Chapter 11 bankruptcy after selling just 100 of its all-electric sedans.
Even Tesla faced an uphill battle, struggling with years of losses before finally realizing a profit just this quarter. In fact, founder Elon Musk was reportedly nearly broke before the company’s IPO after having invested his $200 million in PayPal proceeds into the company.
Proving the Model
Tesla’s first quarter profits suggest that there may be hope for electric vehicles, despite the difficulties faced up until now. With the perfect storm of technological innovation, consumer readiness to adopt, and government subsidies, the industry may finally be on the verge of attracting the critical early-adopters before moving towards mass acceptance.
Perhaps the most important vote of confidence was by Consumer Reports magazine, which gave Tesla’s Model S a score of 99 out of 100 points – an award given to only one other car (the Lexus LS460) back in 2009. The move is even more significant given the New York Times’ initial scathing review of the Model S earlier this year that caused somewhat of a shockwave among observers.
With consumers and the media onboard, Wall Street may finally be warming up to the idea of electric vehicles, judging by the company’s share price that jumped more than 50% over the past few days on heavy volume. Some investors may be waiting for a couple more quarters of profits, but the early adopters are certainly already onboard.
Validating the Industry
Tesla’s story is certainly captivating, but investors are now asking themselves what the story means for the industry. While large automotive companies continue to struggle selling to consumers, the best near-term plays may be in industrial sectors. For instance, companies like AMP Holding Inc. (OTCBB: AMPD) are bringing battery-powered drive train technology to the step van market.
Recently, AMP Holding acquired the Workhorse® brand, a leading truck OEM, from Navistar International Corp. (NYSE: NAV) amid their restructuring, which helped it immediately gain a foothold in the medium-duty step van industry. By integrating its battery-electric technology, the company hopes to slowly wean commercial customers from fossil fuels to fully electric drive trains.
Other companies to watch include battery makers. While many of these companies compete on a commodity level, some are developing innovative battery technologies that differentiate themselves from the industry-standard lithium-ion format. For instance, lithium iron phosphate batteries represent a new and upcoming technology to watch in the space.
In the end, Tesla’s success may give investors a reason to take another look at the entire sector, including both large- and small-caps targeting both consumer and industrial markets.
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