In the 10 days since Tesla Motors (TSLA) unveiled the prototype of its Model 3 sedan, more than 325,000 people around the globe have put down $1,000 deposits for the car.
That’s more than $325 million in Tesla’s coffers, which the company gets to keep for more than a year; deliveries of the $35,000 four-door sedan won’t begin until late next year.
And if every reservation-holder eventually pays $35,000 for the car, that’s $11.4 billion.
What does this mean?
It means that demand is high for an affordable car that:
• Seats five adults
• Goes more than 200 miles on a single charge
• Eliminates the need to stop at gas stations
• Has partial self-driving capability (for an extra fee)
• Has access to Tesla’s network of superchargers (for an extra fee)
• Provides the kind of driving performance (cornering and acceleration) previously limited to expensive and complicated sports cars.
• And can be bought online for a fixed price, allowing you to avoid the oft-dreaded experience of dealing with a car salesperson.
And what does this mean for the automobile industry?
It means the revolution is under way, and that Tesla Motors is truly in the leadership position.
Now, as long-time readers know, I’ve been driving a Tesla Model S for years. Mine was delivered September 14, 2013 (a date I remember just as I remember my three children’s birthdays) and now has more than 33,000 miles on it.
And I’ve been recommending TSLA as an investment even longer. Readers of my Cabot Stock of the Month who bought when I originally recommended the stock back in December 2011 are now sitting on profits of more than 800%.
In short, I’ve been following this story a long time, as both an owner and investor, and I feel fairly well informed about the big picture.
And the big picture is this: There are a ton of changes coming to the automobile business, which collectively will create some new winners, while killing some of the companies in the business today.
The Next Automobile Revolution
These changes start with Tesla’s well-regarded electric powertrain, but they go far further.
They include:
The Rise of Autonomous Driving. Today’s Teslas include Autopilot, which works great for both highway and stop-and-go traffic, and both Google (GOOG) and Apple (AAPL) are working on self-driving cars. In the long run, this progress should sharply reduce the number of people killed in auto accidents each year (roughly 34,000 in the U.S.!).
The Rise of Car Sharing and Ride Sharing. Zipcar, Uber and Lyft are the big names here, but there are others. One of the surprising participants is General Motors (GM), which invested $500 million in Lyft recently, and in Chicago is supplying vehicles to Lyft driver wannabes who don’t own their own vehicles.
The Overhauling of the Automobile Dealership Industry. According to a recent Gallup poll, the only people less trusted than automobile salespeople are telemarketers, Congressmen and lobbyists. By selling directly to consumers—and making them very happy—Tesla Motors has shown that these salespeople add no value. If they don’t change—Poof!
The Slow Implosion of the Gas Station Industry. As fewer and fewer cars burn gasoline, look for more roadside locations to be repurposed into other uses.
This revolution will bring wonderful benefits in the years ahead that should make automobile travel both more efficient and safer, and I’m fairly confident that Tesla Motors will be one of the winners. But who will be the losers? My number one suggestion is Toyota (TM), for two big reasons.
What’s Wrong With Toyota?
Toyota is the most valuable automobile company in the world today, with a market capitalization of $155 billion. But the company is no longer growing. Revenues at Toyota declined 3% in 2014 and 5% in 2015. And when growth slows at a company, terrible things can happen to a stock. In fact, one general rule is, the bigger they are, the harder they fall. Thus, its sheer size is the number one reason I’m bearish on Toyota.
Reason number two has to do with the company’s technology. Toyota has done a wonderful thing with its Prius over the past 20 years. It’s proved to the world that there is success beyond the internal combustion engine.
But Toyota has taken a curious turn in recent years. It’s been working on hydrogen fuel-cell technology rather than electric car technology.
This is despite the fact that hydrogen refueling stations are extremely rare, while electricity is ubiquitous; despite the fact that no other automakers are working seriously on hydrogen; and despite the fact that Elon Musk has said that “hydrogen is an incredibly dumb” alternative fuel. Granted, there’s no reason to think that Toyota’s scientists should listen to Musk. But his argument, detailed below (and edited for clarity), appears to make sense.
“Hydrogen is an energy storage mechanism. It is not a source of energy. So you have to get that hydrogen from somewhere. If you get that hydrogen from water, you’re splitting H2O, and electrolysis is extremely inefficient as an energy process. By contrast, if you just took a solar panel and used the energy from that to charge a battery pack directly, you’d find it far more efficient. If you try to split water, take the hydrogen, dump the oxygen, compress the hydrogen to an extremely high pressure (or liquefy it) and then put it in a car and run a fuel cell, it is about half as efficient; it’s terrible. Why would you do that? It makes no sense.”
Time will tell.
In the meantime, Toyota is still shrinking. In the first quarter of this year, sales at the automaker slumped 1.1%, highlighted by a drop of 2.7% in March. And now investors are voting with their feet.
Here’s a chart of TM.
And here’s a chart of TSLA.
Now, I’m not saying you should short TM here and buy TSLA. Both stocks have been moved by recent news, and I think that short-term, both are ripe for a bit of retracement (TM to the upside and TSLA to the downside).
But long-term, as this revolution unfolds, I see great upside potential in TSLA (which is still working to break out of its two-year trading range), and I see great risk in holding Toyota.
Note: there is one other automobile company that I like. I added it to my Cabot Stock of the Month recently, and every week I give my readers updated advice on both that stock and TSLA. If you’d like to join them, I’d love to have you. For details, click here now.
Sincerely,
Timothy Lutts
Chief Analyst, Cabot Stock of the Month
