Tesla Motors Inc (TSLA): The Big Battery Bet of Elon Musk

Now that the afterglow of Tesla Motors Inc (NASDAQ:TSLA)’s profitable first quarter has faded, many are questioning the long-term viability of Tesla Motors Inc (NASDAQ:TSLA).  Tesla Motors Inc (NASDAQ:TSLA)’s share price has gained over 90% since their earnings report on May 8, largely on the strength of sales of 4900 Model S sedans in the quarter, better than the next highest selling electric vehicles, the General Motors Company (NYSE:GM) Volt at 4421 units and the Nissan Leaf at 3695.

Alleviating range anxiety

Tesla Motors Inc (NASDAQ:TSLA) has stated the expectation that it will sell about 20,000 Model S sedans this year, and that’s a good pace, but it begs the question what happens when current demand in the U.S. is satisfied. Tesla Motors Inc (NASDAQ:TSLA)’s current approach seems to be to boost demand by addressing concerns about travel range and battery life.  Tesla Motors Inc (NASDAQ:TSLA) offers extended service plans which cover the battery for up to eight years.  At D11 yesterday,  Elon Musk pre-announced the rapid expansion of the “supercharger” stations that can charge a Tesla Model S with supercharging capability to about half capacity in as little as 20 minutes.  Musk promised 80% coverage of the U.S. by 2014 and the ability to drive from Los Angeles to New York in a Model S.

As long as you don’t mind stopping for that 20 minute break every 265 miles or so.  This is the EPA estimated range of the Model S with the larger of two battery options, which pushes the price of the Model S to $79,900 before tax credits.  A Model S, equipped with the smaller battery and shorter EPA estimated range of 208 miles, will still set you back $69,900 before credits.

Targeting the cars at the luxury market was a necessity for Tesla, given its commitment to a fully electric vehicle with decent range.  The battery packs alone cost about $24,000 and $34,000 for the smaller and larger sizes respectively.  Wrapping an economy car body around those battery packs wouldn’t have worked, since Tesla would have ended up with a cheap looking car that cost $50,000.

Moving up market allowed the batteries to be a smaller part of the total purchase price of the car, and allowed Tesla to exploit the novel quiet and turbine smoothness of electric drive to appeal to luxury car buyers.  The result was a luxury car for the eco-conscious elite, but it won’t really make Tesla a successful car company.