During my senior year of college, I had the opportunity to fly from Cleveland to New York in order to interview with the equity research department at JPMorgan Chase.
My good fortune started with sending an e-mail to a high-powered alumnus who received his MBA at Case Western Reserve and had risen to become a Managing Director at one of Wall Street’s most prestigious banks.
Before continuing the story, I should first mention that my undergraduate advisor who is the current Assistant Dean at CWRU’s business school advised me not to contact this alumnus because he felt the person had become too senior within the J.P. Morgan organization. After a brief deliberation, I looked past my advisor and confidently clicked the “send” button in my Gmail.
A short time later, I found myself sitting across the table from the influential J.P. Morgan exec whom my advisor considered to be unreachable. We met at a small, tucked-in restaurant within a whisper of JPMorgan’s headquarters at 383 Madison Avenue, the former location of Bear Stearns.
At the time of our meeting, Tesla Motors Inc (NASDAQ:TSLA) was an unproven entrepreneurial venture backed by a $450 million loan from the Department of Energy. Shares traded in the $19 to $20 range, a discounted valuation which reflected the uncertainty in the electric car business given the failure at Fisker Automotive and many others.
Fast forward to present date, and Tesla Motors Inc (NASDAQ:TSLA) is trading upwards of $90 per share, preparing to repay its DoE loan, and perhaps even disrupting the traditional auto industry.
While I can’t predict what Vivek Aalok or I will do next, here are six reasons why I believe Tesla Motors is shaping up to be the next Apple Inc. (AAPL) or Google Inc (GOOG):
- Tesla Motors’ four passenger sedan Model S became an overnight sensation as the best-selling luxury car during Q1 2013 with approx. 4,750 units sold, handily outpacing the 3,077 units for Mercedes-Benz’s S-Class by more than 50%. The Tesla Model S lists at $62,400 or $72,400 with 60 kWh and 85 kWh battery packs respectively.
- The company has demonstrated initial success in the luxury high-end market with Model S and is preparing to widen its appeal with a luxury SUV (Model X) and a lower-priced model for the high volume middle-class market.
- On May 15, Tesla Motors announced a common stock offering of 2.7 million shares and $450 million of senior convertible notes. [Author’s Note: Equity increased to 3.4 million shares due to high demand, priced at $92.24 per share. Debt increased to $600 million]. The company is planning to use proceeds for repayment of the Department of Energy’s loan in full with interest.
- Anyone who is familiar with Tesla cofounder Elon Musk is aware that it isn’t wise to bet against this man. The 41-year-old chairman and CEO is a Wharton School graduate and founded PayPal before selling out to eBay Inc (NASDAQ:EBAY) in 2002 for $1.5 billion, collecting more than $160 million himself in the process. Furthermore, Musk plans to purchase $100 million of Tesla’s new common stock, a clear vote of confidence in Tesla Motors Inc (NASDAQ:TSLA)’s surging share price.
- As of the most recent Nasdaq settlement, a massive 37.5% of Tesla shares are borrowed by short sellers that are betting the stock will go down. Short interest has fallen from a previous 45% and I believe it will continue to fall as sentiment begins to change.
- Wall Street is optimistic on Tesla Motors Inc (NASDAQ:TSLA) following the company’s highly successful capital raise with respect to improved financial health, company reputation, and growth opportunities. Analysts at Morgan Stanley raised their price target to $109 from a previous $103 and reiterated a “buy” rating. Barclays Capital believes the stock can reach up to $137.
Success where others have failed
Tesla has achieved initial success in the electric car arena where a significant number of others such as Fisker Automotive have failed. He also made competitive inroads against Detroit where predecessors like DeLorean, and Tucker have failed. The company has adopted an all-robotic manufacturing system which has lead it to achieve the highest gross margin in the auto industry, a surprise given its footprint in high-cost California.
The accomplishments at Tesla Motors haven’t gone unnoticed by the major automakers such as General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F). Not only is Tesla becoming profitable, cofounder Elon Musk has defied industry standards through his decision to sell cars via direct-to-consumer. Tesla Motors owns and operates 37 showrooms where consumers can do everything from take a test drive to make a final purchase.
The bold actions by Tesla Motors Inc (NASDAQ:TSLA) have ruffled the feathers of auto industry trade groups, which have employed a system of franchised car dealers dating back to the Ford Motor Company (NYSE:F) Model T in the early 20th century. In particular, Tesla is not allowed to sell its vehicles directly within the State of Texas, and auto dealers are fighting to maintain current laws. North Carolina, for instance, has passed a law prohibiting sales of Tesla cars there, except through dealers.
Tesla’s success with electric cars is most impressive when compared to General Motors Company (NYSE:GM), as CEO Dan Akerson recently stated to the public that General Motors Company (NYSE:GM) loses money on “every” Chevy Volt and the list price on a future model should be $7,000 to $10,000 lower as the company hopes to lower its cost of production. Akerson also stated that GM has sold only 26,500 of the Chevy Volt in total, while Tesla Motors is on track to sell a similar number of vehicles this year alone.
Electric cars remain a niche market and sidestory for General Motors. Wall Street is bullish on the former “Government” Motors as its production costs following bankruptcy are the lowest in company history. The company earns significantly more profit on truck sales than sedans, and sales of large pickups are up 20% year-over-year for the industry according to Autodata Corp. Americans are set to replace an aging vehicle fleet which bodes well for the major automakers.
Outside the United States, General Motors has considerable growth potential with the Buick and Cadillac brands in China, and Europe appears to be turning around. Analysts at Asian investment firm CLSA recently raised their price target on GM to $40 and issued a “buy” rating based on the factors above.
Wall Street is also bullish on Ford Motor Company (NYSE:F) as its 2013 Ford Fusion Hybrid, arguably a low-end Tesla Model S competitor, has an attractive look with a front-end similar to the Aston Martin Rapide and a best-in-class 47 mpg fuel efficiency. Ford is benefiting from pent-up demand with its new Fusion as the vehicle received a much-needed design overhaul.
Ford announced in a formal press release that February marked its best sales month ever for Fusion, with a 600% yearly Hybrid increase in high-demand markets such as Los Angeles. Fusion offers 47 mpg combined city/highway compared to only 41 mpg for the Toyota Camry Hybrid.
Aside from hybrid vehicles, Ford is poised to benefit from higher North American truck sales, an improved balance sheet, and a reduction in European cost structure. Analysts at Craig-Hallum raised their price target on Ford to $18 from a previous $15 back on May 16.
Foolish takeaway
While only time will tell if Elon Musk will become the next Steve Jobs, Larry Page, or Jeff Bezos, at present he certainly appears to be well on the way. Tesla Motors is revolutionizing the electric car market (and disrupting the traditional auto industry) similar to how Apple Inc. (AAPL) transformed mobile phones with iPhone and introduced an entire new product category with iPad.
As if Tesla needs an additional lever for momentum, the company is hosting its annual shareholder meeting on June 4, 2013 which is certain to gather further media attention and investor interest. I suspect Tesla will become a retail investor favorite, given its growing public attraction and market publicity. Elon Musk might need to steal Samsung’s motto, as “the next big thing is already here.”
Let me know your thoughts on Tesla Motors in the comments section below. Can Tesla continue to disrupt the traditional auto industry, or will General Motors and Ford deliver a strong response?
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The article Looking for the Next Apple or Google? It’s Already Here originally appeared on Fool.com.
John Macris 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. John 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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