Is This Bad News for TSLA Stock?
If you think the run in Tesla Motors Inc (NASDAQ: TSLA) stock is over, think again.
Sure, Tesla’s stock price has declined quite a bit since entering 2016, but the company’s business is still going strong. And if you are worried about Tesla’s competition from traditional automakers stepping into the electric vehicle (EV) business, things might not be as bad as you think.
Let me explain…
One of the cars that caught people’s attention at this year’s North American International Auto Show (NAIAS) in Detroit was the “Chevy Bolt,” an all-electric car from General Motors Company (NYSE:GM).
General Motors said that it will begin shipping the Chevy Bolt in late 2016 with a starting price of $37,500. After government incentives, it will cost consumers around $30,000. The electric car will have a range of more than 200 miles. (Source: “6 hot debates at the Detroit auto show,” USA Today, January 14, 2016.)
Since the Chevy Bolt starts at a similar price to the much-anticipated Tesla “Model 3,” you might wonder whether TSLA stock and the company’s business will be affected. The short answer: not really.
Sure, both the Tesla Model 3 and Chevy Bolt have similar price tags and driving ranges, but that’s where similarities end. If you take a look at the Bolt, you’ll see that it is a four-door hatchback similar to the “Nissan Leaf,” a typical city car. Tesla’s Model 3, on the other hand, is aimed to be a luxury, high-performance electric sedan, albeit at an affordable price, making the Model 3’s appearance much sleeker.
Plus, the cars are nowhere near the same on the performance front. GM has said that the Bolt will accelerate from zero to 60 miles per hour in under seven seconds, which is not bad. However, the Tesla Model 3 is expected to be in the real performance car category, sprinting from zero to 60 miles per hour in just 4.1 seconds!
There is another reason why cars like the Chevy Bolt will not be a worry for Tesla: dealers of traditional car makers simply don’t want to sell electric vehicles!
You see, car dealers make the most money from the service and parts department, not from new car sales. For instance, Forbes reported that for Penske Automotive Group, which operates both in the U.S. and in the U.K., “services and parts represented 13% of annual revenues, but 44% of the gross profits.” (Source: “The Surprising Ways Car Dealers Make the Most Money Off You,” Forbes, last accessed January 14, 2016.)
The fact is that margins on new car sales are quite thin compared to those on repairs and maintenance. For the Penske Automotive Group, gross margin was just eight percent for new car sales, but a whopping 57% for service and parts. (Source: Ibid.)
Note that many electric vehicles require less maintenance than those powered by internal combustion engines. Additionally, EVs don’t require oil changes and fewer moving parts. What this all means is that dealers are sure to profit less from the sale of EVs in the repair and maintenance department—their most profitable area.
According to an article in The New York Times, industry insiders have found that “electric vehicles do not offer dealers the same profits as gas-powered cars.” Moreover, 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.) The result is that traditional car dealers do not have enough incentive to sell electric cars.
But what about 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. While traditional dealers have incentive issues selling EVs from traditional automakers, the incentive problem is non-existent for Tesla.
The Bottom Line on TSLA Stock
At the end of the day, a concept car needs to transform into sales. If car dealers don’t want to sell them, EVs made by traditional carmakers are going to have a hard time finding buyers. Meanwhile, Tesla just eclipsed the 50,000 mark in its 2015 car sales.
As the company ramps up production of the Tesla “Model X,” its SUV model, and prepares for the launch of its more affordable Tesla Model 3, 2016 has the potential to become a great year for TSLA stock.