Tesla is also in the cross-hairs of dealer networks. The dealers are claiming that Tesla Motors Inc (NASDAQ:TSLA) is a manufacturer directly competing with them, and they provide a valuable service to the general public, whereas Tesla is just a company that cannot provide that level of service without a network of its own. Only time and voters will tell what happens in this battle.
Stepping on Dealers’ Toes
Tesla Motors Inc (NASDAQ:TSLA)’s sales model is to directly sell its cars to consumers, totally bypassing the dealer networks that General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) have spent decades and millions of dollars building. The National Automobile Dealers Association has stated that it offers “a reliable network for sales and service, which is strictly regulated to ensure the vehicle transportation needs of car buyers are met.”
Fiskar Automotive is a great example of a car company growing too fast with too little support. The Karma was a cousin of the Volt, and shared much of the same technology as General Motors Company (NYSE:GM). However, potential buyers were turned off by the low number of shops to repair their cars. This, among supplier issues, led the ambitious company to file for bankruptcy this year.
Tesla Motors Inc (NASDAQ:TSLA)’s potential buyer market could skyrocket if it were to team up with General Motors Company (NYSE:GM) or Ford Motor Company (NYSE:F). Tesla sold over 4,750 Model S cars in the first quarter of this year. Access to the dealer networks would give Tesla access to thousands of locations and give consumers a place to test drive the vehicle.
Competition is heating up
GM’s Volt and Ford Motor Company (NYSE:F)’s C-MAX may be just getting their bearings, but these two giants in the auto industry know that they have customers that are uncomfortable purchasing cars over the Internet, and these customers in the over 45 category are the wealthiest demographic in the US. Those looking to purchase electrified vehicles that are more moderately priced than the Tesla scooped up plenty of vehicles from Ford & GM. Year to date, Ford sold 3,711 C-MAX hybrids. While across the street GM sold 9,855 Volts year to date, and over 30,000 Chevy Volts and Opel Amperas last year.
With a market cap of over $12 billion, Tesla has a higher value than Mazda. As GM launches the Cadillac ELR early in 2014 Tesla’s stock price needs to fall more in line with its fundamentals.
The fundamentals
GM was able to eek out 2.8% net profit margins while funding its pension liabilities and repurchasing shares from the US government; it pays no dividend. Ford, on the other hand, has a net profit margin of 4.3% and pays out 17% of its earnings to support a dividend of 2.4%. Both companies have massive pension obligations, however Ford’s management team has been able to return to profitability without declaring bankruptcy.
Tesla Motors Inc (NASDAQ:TSLA) is a relatively new company with a new business model. It has a host of different revenue streams: vehicle sales, licensing technology, selling carbon credits to other manufacturers. And to boot, it doesn’t have the legacy workforce costs both Ford and GM do.
The model is so drastically different from Ford and GM that it is hard to compare the three. Tesla is valued at 22 times forward earnings, while Ford and GM are valued at 11.6 and 12.6 respectively. Tesla does have a lot more room to grow on a total auto sales basis, however the market for high-end luxury vehicles is a lot smaller than all of the markets both Ford and GM cater to.
If Tesla Motors Inc (NASDAQ:TSLA) were to merge with one of the larger automotive companies, the advantage could be huge. We could see more electrification of vehicles of all price points, reducing our dependence on oil, and the long-term cost of vehicles. This could translate into a boon for stockholders of Tesla, as the company’s stock seems to have gotten ahead of its fundamentals.
Toyota has already leased Tesla’s technology for their Rav4 EV, and it is the car company to beat, with a market cap of nearly $200 billion. Tesla’s technology and premium brand could be leveraged with the Toyota dealer network.
Foolish bottom line
Tesla’s owner is about as independent as they come. Elon Musk is always willing to talk and do business with the other auto companies, but he wouldn’t want his company to become just another brand. His sales model is revolutionary, and takes out the haggling process. Made-to-order cars is something that Tesla can do since it doesn’t have a legal obligation to not compete with a dealer network, like both Ford and GM have.
Short sellers have been squeezed by Tesla Motors Inc (NASDAQ:TSLA)’s stock defying gravity, but how long can it sour there? This stock is not for the faint of heart. GM has been trudging along; will offering up more EV models to the higher-end market be the shot it needs? Ford has been the stable player for shareholders, and pays a reasonable dividend to boot. Conservative investors would be wise to purchase shares of Ford if they are looking for exposure to the auto market.
The article Should Tesla Hook up With Another Automaker? originally appeared on Fool.com and is written by Wes Patoka.
Wes Patoka has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. Wes is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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