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Stock Strategist

Tesla's Future Charged With Uncertainty

The carmaker is a formidable disruption threat, but even its CEO says the stock price looks high.


 Tesla Motors (TSLA) has the momentum and charging infrastructure to be the dominant electric vehicle firm, but we do not see it having mass-market volume for at least another decade. Tesla's product plans for now do not mean an EV for every consumer who wants one, because the price points are too high. We think the Model X crossover due in 2015 will start somewhere between $55,000 and $70,000, but will average higher as consumers add options. The Model 3 sedan will start at about $35,000, according to an interview with CEO Elon Musk earlier this year, and will start selling in 2017 or 2018. This price is before any tax credits, but the $7,500 U.S. federal tax credit only applies to the first 200,000 vehicles Tesla produces starting Jan. 1, 2010.

Tesla has said that when its gigafactory--a lithium-ion battery plant under construction in Nevada--is fully operational by 2020, it will be able to produce 500,000 vehicles a year at its sole assembly plant in Fremont, California. Without the gigafactory, Musk said on the July earnings call that the firm can make 200,000 vehicles "if you really push it." Even if demand exists for these vehicles, this quantity is quite small relative to total global auto production, which is likely to reach 100 million units in the next few years. Therefore, we think global mass adoption of pure electric vehicles is still a long way off. In the meantime, Tesla will have growing pains and perhaps more than one or two recessions to fight through before reaching mass-market volume. Even if industry forecasts of sub-1% market share for EVs prove far too conservative, it is important to keep the hype about Tesla in perspective relative to the company's very limited production capacity. Tesla's mission is to make EVs increasingly more affordable in order to bring electric mobility to the world, which means more assembly plants must come on line to achieve annual unit delivery volume in the millions. This expansion will cost billions a year in capital spending and research and development and will need to be done even during downturns in the economic cycle.

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David Whiston does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.