You’ve probably heard the news by now – CHEAP GAS IS BACK.
Drivers are rejoicing at the pumps.
But companies of the likes of Tesla, who have wagered on the increase of fuel prices and a growing consumer sentiment towards the environment, may be in serious danger.
Simply put – the crash in crude oil prices is eating into the relative advantage of an electric car like Tesla.
But first, a little background.
The brainchild of legendary Elon Musk, Tesla Motors (TSLA) strives for the same goal it set forth at origination in 2003 – to accelerate the advent of sustainable transport by bringing compelling mass market cars to market. An American-based manufacturing company, Tesla has been driving (pun intended) luxury electric vehicles to consumers for over a decade.
“That’s the genius of the product – consumers are not doing any cost/benefit calculations – but rather saying ‘I want one’” (Max Warburton, Bernstein)
For those of you unfamiliar with Elon Musk, I strongly suggest you watch the below video clip. He’s somewhat amazing.
Back in 2003, when Tesla originated, gas prices were climbing. But all of a sudden, Hummers and SUVs are coming back into style.
We are experiencing a four-year low in U.S. gas prices.
Now, when gas prices go down, people typically buy more cars. Less money spent on gas equates to a rise in overall GDP – money saved at the pumps can be spent elsewhere. But what takes a hit is fuel-efficient cars. The cheaper gas becomes, the higher the opportunity cost of switching to a battery-powered vehicle.
Consider the current consumer of a Tesla – a vehicle that costs northward of $70,000. It’s not the average layperson scraping together last month’s paycheck. No – it’s the wealthy. The type of wealthy looking to add a third, fourth, or fifth luxury car to their collection. So it’s fairly safe to assume that Silicon Valley’s millionaires (& those not too far behind) will still line up to buy this flashy vehicle.
But remember – Tesla’s goal is to bring sustainable transport to mass market. The company has been working to drive down the price of its vehicles. In fact Tesla has a specific objective – a $35,000 Tesla Model III is expected to arrive to market in 2017. But plunging oil prices will still make a $35,000 vehicle look expensive.
Tesla stock has been trading at 80 times forecasted 2015 earnings.
The market is nervous. Although TSLA is up about 52% for the year, the stock closed below its 200-day average for three straight days in a row this week. And the 20-day and 50-day moving averages don’t look too hot either.
Why? Because, while the millionaires may be still lining up, forecasts of TSLA are based on the company’s ability to sell hundreds of thousands of cars. And the new $35,000 vehicle certainly isn’t going to appeal to any millionaires. (“I wouldn’t dare spend less than $70,000 on a car – how cheap!”) …You get the point.
Barclays forecasts a TSLA price target of $220 by predicting that Tesla’s Model III sales will reach 350,000 by 2020.
Don’t get me wrong – Tesla will probably still achieve this goal. In fact, with Elon Musk behind the wheel, I have no doubt. It just might be slower than what the market anticipated. The longer oil prices stay low – a phenomenon that seems to be enduring – the riskier TSLA valuation becomes.