TSLA Stock: Could This Be Bad News for Tesla Motors Inc?

Bad News for Tesla MotorsTSLA Not Afraid of Competition

Elon Musk is never short of daring ideas, as evidenced in some of his recent ventures. However, for investors in his company Tesla Motors, Inc. (NASDAQ:TSLA), the focus is more on electric cars rather than rockets and solar panels. Fortunately, the company is doing quite well, with analysts saying that there is a lot of upside room for Tesla’s stock price to go. Moreover, when it comes to selling electric vehicles, traditional automakers don’t seem to have the upper hand over Tesla.

One of the arguments Tesla bears love to make is that many traditional automakers are also making electric vehicles. Moreover, traditional automakers have a much larger client base compared to Tesla. However, if you look into how traditional automakers sell their cars, you’ll see that Tesla has little to worry.

Why Tesla Isn’t Worried

Here’s a fact: car dealers don’t really want to sell electric cars. You see, at the end of the day, car dealers want to make money. And according to industry insiders, “electric vehicles do not offer dealers the same profits as gas-powered cars.” Also, electric vehicles (EVs) “take more time to sell because of the explaining required, which hurts overall sales and commissions.” (Source: “A Car Dealers Won’t Sell: It’s Electric,” The New York Times, November 24, 2015.)

Another thing is with repairs and maintenance. For dealerships, the bulk of their profit comes from the service and parts department. For example, Forbes recently reported that Penske Automotive Group’s “service and parts represented 13 percent of annual revenues, but 44 percent of the gross profits.” The reason is that margins on new car sales are quite thin compared to those on repairs and maintenance. For Penske Automotive Group, which has operations in the U.S. and the U.K., gross margin was just eight percent for new car sales, but a whopping 57% for service and parts. (Source: “The Surprising Ways Car Dealers Make the Most Money Off You,” Forbes, last accessed November 27, 2015.)

Many EVs require less maintenance, which means less profit for dealers. Combine this with the thin margins on selling EVs and car dealers simply don’t have enough incentive to do so. As a result, satisfaction with buying EVs from dealers of traditional automakers will be undermined. A J.D. Power survey showed that electric car buyers were “significantly less satisfied with their car dealer than were buyers of traditional cars.”

What does this mean for Tesla? Well, Elon Musk made the smart decision of not using the traditional dealer system. Instead, Tesla has been pursuing a company-owned store and service center model. Therefore the incentive problem faced by traditional automakers making EVs is nonexistent for Tesla.

The Bottom Line on TSLA Stock

The value of TSLA has long been noticed by investors. Most recently, analysts at Credit Suisse reaffirmed their outperform rating on Tesla stock and their $325.00 price target. That is a 41.5% premium over Wednesday’s closing price of $229.64. The analysts believe that Tesla should be able to reach 17,000 units in the fourth quarter and the “Model X” cars could add $7.00 to Tesla’s earnings per share in 2016. (Source: “Tesla Should Meet Fourth-quarter Guidance, Credit Suisse Analysts Say,” Market Watch, November 25, 2015.)

So, Tesla has been doing quite well this year, and has little to worries when it comes to competition from EVs made by traditional automakers. With the Model X rolling off of the production line and the mass market “Model 3” in the works, TSLA’s stock price might just reach Credit Suisse’s target of $350.00.

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