In recent weeks, I have either received questions or read articles about how gas prices impacts the fortunes of plug-in electric vehicles and PEV manufacturers. As gas prices stretch to $4 per gallon, many are trying to figure out if that’s the trigger to make PEVs mainstream, and with it, bring PEV companies like Tesla, CODA Automotive, Fisker Automotive, and Wheego into the mainstream as well. There is a lot that goes into the equation for trying to figure out how gas prices impact startup vehicle manufacturers, so I was surprised when Morgan Stanley came out with the bold declaration that a $1 increase in gas prices equates to about a 13 percent gain in Tesla’s stock price.
The explanation of the math behind Morgan Stanley’s calculation is a not exactly linear. They claim a $1 increase in gas prices results in a $3,500 additional cost (present value) in fuel for a 25 mpg vehicle over the life of the vehicle. This increase is about 25 percent-30 percent the cost of the battery in a BEV with a $12,000 pack cost. Now the non-linear thinking comes when they determine that this results in a 13 percent increase in the stock price because buying Tesla stock is a hedge against rising oil prices.
I find it very difficult to boil down the company’s products and market strategy into the assumption that gas prices have a direct link to the company’s value. Particularly since Tesla’s main products are all playing in a market segment where gas prices carry significantly less importance – those buying $100,000 sports cars or $60,000 luxury cars are not likely to be overly concerned with fuel costs. Add to this the fact that Tesla’s next generation products are still years away, their dealer strategy is progressing at a snail’s pace, and they are years from profitability. While I do appreciate that Tesla has made tremendous strides with their powertrain business and the Model S looks to be a low-volume winner, I find it difficult to subscribe to the theory that the value of a luxury automaker is going to be that closely tied to fuel costs – even an electric automaker.
If you compare the correlations of Tesla’s stock price to that of other traditional automobile manufacturers like Ford, Toyota, Nissan, BMW, and Honda, they are much higher than the correlation with the price of fuel. Not surprisingly (to me anyway), Tesla’s stock price since its IPO is most highly correlated to BMW’s stock price, another luxury automaker. And BMW is not particularly well known for their fuel economy. Tesla may argue that they are the antithesis of the traditional automotive industry, but based solely on stock values, it’s pretty clear that their fate is very closely tied to the luxury car market.
Instead, the industry as a whole will see an impact from gasoline prices in their sales over the longer haul. Companies like Ford, Toyota, and Honda that have successful small cars, hybrids, and burgeoning plug-in vehicles will see their successful vehicle strategy reflected in their stock price. Companies like GM and Chrysler, whose sales are truck and large car heavy, will see their stock price struggle a bit more as demand falls for larger vehicles. I do recognize that both of these companies have small car programs and plug-in vehicles in GM’s case, but they are not yet as successful as others.
Tesla will likely land in the middle somewhere. They will benefit from lower fuel costs, but suffer from the marketing and business challenges enumerated above.
So, how do fuel prices impact Tesla? My opinion is that in the near term, they don’t, and they certainly won’t impact them in a neat little equation of $1 to 13 percent. Morgan Stanley’s prediction of a $70 stock price is based on a long-term (15 year) forecast with revenues jumping 150 times current revenue by 2025. This type of growth is not out of the realm of possibility, if they can manage their costs, continue to grow their drivetrain business, and keep new, competitive, products coming. However, higher fuel prices just open the door for Tesla, and I’m skeptical it will ultimately drive the stock price.
Article by Dave Hurst, appearing courtesy the Matter Network.