Tesla electric cars stock fired up, ready to go

By CHRIS UMIASTOWSKI

With last year's launch of the Model S, the electric car company suddenly had a practical all-electric, no-gasoline sports sedan with a reasonable base price

Not too long ago, I came to the conclusion that electric cars are for real, and are poised to see stellar growth over the next decade. The company that convinced me of this was not one of the big auto makers. It was California-based Tesla Motors Inc.

Because of their accomplishments and the early nature of growth in this market, I wound up becoming a shareholder. And with Whole Foods Market, I now have two stocks I'd like to add to my Strategy Lab portfolio, and I'll likely be selling my shares in Sprint to accommodate them.

Given the huge runup in Tesla's stock since I've become a shareholder, I'd secretly love for Wall Street to be disappointed in the short term sometime soon, creating an opportunity for long-term shareholders to buy more.

Tesla's current success comes on the back of a single car, the Model S. This full-sized sports sedan has no gas tank. It's run only by batteries. On a full charge, it can go about as far as my family's Lexus SUV, but the savings add up to about $50 per "tank." Since introducing this Model S in mid-2012, Tesla has gone from being a "show me" story to the company that may disrupt the entire automobile industry, earning it the complimentary title "the Apple of the car industry" from many observers.

I believe Tesla found a successful model for selling electric cars because it didn't first aim for affordability. Instead the company focused on making a no-compromise car knowing it would come with a high price point. They launched in the luxury segment of the market. Their first car, the Roadster sports car, cost more than $100,000 (U.S.) and Tesla produced about 2,500 units. This developed Tesla into a luxury brand. Then, with last year's launch of the Model S, the company suddenly had a practical sports sedan with a base price of about $70,000 – still in the luxury price range, but substantially less expensive than a Roadster. Within a couple of years, the company expects to sell cars that will cost $30,000 after government rebates.

Tesla is already profitable. This week the company reported its first-quarter results, manufacturing more than 5,000 Model S cars in the quarter, recognizing revenue on 4,900 of them and bringing in $562-million in revenue with 17 per cent gross margin and net profit of $11-million. Their volume of approximately 20,000 cars per year is equivalent to what GM sells in the U.S. market in an average week. It's hardly what you could call relevant industry volume, so it's all the more impressive that Tesla can be profitable with this level of production.

I think Telsa was brilliant to build its brand by launching high-priced cars that actually meet the needs of most drivers. They will easily sell the 20,000 units they plan to manufacture this year, and I'm confident that its new financing program (in the United States) and the launch of the Model X, a sport utility vehicle, in late 2014 will bring substantial demand growth. Keep in mind that Tesla is only just getting started with its electric cars on the world stage. So far they've made zero deliveries of the Model S outside of North America.

As I write this, analysts who cover the stock expect Tesla to post earnings per share of $1.65 next year according to S&P Capital IQ. Given the strong quarterly results (the stock price jumped 24.4 per cent in Thursday trading), I imagine estimates will be revised higher. I believe Tesla is on a path to achieve incredible growth over the next decade. One of my investing mantras is that people tend to overestimate change in the short term, yet underestimate it in the long term. In the next year or two, I don't have any illusions about electric vehicles becoming commonplace. But in 10 years? Sure.

Ten years ago, I don't think we had any clue how important wireless broadband technology would become. We didn't imagine being able to watch streaming video on a mobile phone. Just the same, I think in 10 years we may look back at all the money we wasted on gas-powered cars. Electric cars don't need $65 gas-tank fill-ups. They don't need oil changes, spark plugs or smog checks. They don't need replacement timing belts, mufflers, catalytic converters, fuel injectors, oxygen sensors or many of the other complex electro-mechanical parts required by gasoline cars.

I like owning stocks in companies that are leaders in an industry facing disruptive growth. I think Tesla is that company in the automotive industry. Sure, I missed out on a chance to buy this stock at less than half the price back when my Strategy Lab portfolio launched. But Tesla is now much further along the road to proving itself as a sustainable company. Its market cap seems high, having reached $8-billion following Wednesday's earnings report. But for comparison, BMW is worth more than $60-billion and generates significantly weaker gross margin per vehicle. If there is a future for the electric car, I think Telsa gives investors plenty of growth opportunity.

Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab.

Special to The Globe and Mail

Are solar energy stocks a BUY???

by Jeff Siegel, from Modern Energy Report, Energy & Capital

Last week, the Chinese government announced it will more than double its installed solar capacity in 2013.

In an effort to help China-based solar manufacturers eat through a massive glut that has pressured margins for more than two years now, the Middle Kingdom is hoping that by consuming its own product instead of shipping nearly everything overseas, it can provide some relief to its solar industry.

Certainly, this will happen. But even with the mountains of cash the government is now plowing into the sector, its still not going to be enough to fix the oversupply problem in the near term...

Yes, it will help alleviate some of the problem — but the fact is most of these companies still aren't making any money this year.

So really, this solar push in China is more about keeping these companies afloat until supply no longer exceeds demand — at least, at this level.

Still, this reality has not kept solar stocks from rallying over the past few months. And quite frankly, I don't know how long it'll last.

But I can tell you most of this recent run has pushed stock values to levels that simply don't make sense. And at some point, they'll have to correct.

Of course, that's not to say all the recent gains in the solar sector are overdone... and it didn't hurt that back on January 4, the company announced its rooftop solar installations were set to climb 60% this year, and that it expected to be cash flow positive by the end of the year. On that news alone, the stock jumped more than 10%.

The question now is: How much higher can this thing go?

To be honest, I have no idea. But here's what I do know: I never jump on a falling knife, and I never chase a flying stock.

Although I think SolarCity can be properly valued at around $18 a share, I'd be hesitant about paying more than $15 right now.

It's funny, but I remember when I first told my Power Portfolio readers about SolarCity all the way back in February...

I received a number of emails from readers who didn't want to touch a solar stock.

There's a very real difference between a solar manufacturer with suffocating margins and a company that generates millions from solar installation and leasing contracts.

Despite the few remaining knuckle-draggers in the media who still haven't figured out that the solar industry is here to stay — and that it will continue to grow by leaps and bounds over the next decade — most energy investors know there's big money in solar installation... particularly with so many manufacturers selling their goods at a loss just to get inventory out the door.

Bottom line: It's never been a better time to be an installer.

And SolarCity does allow for regular investors to get a piece of that action.