Cheap Oil is Killing TSLA Stock, But Not Killing Tesla Motors

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Tesla Motors (TSLA) is facing a handful of problems right now, judging from the 38% dip the Tesla stock price has suffered since the middle of last year. But, contrary to common belief, low oil prices — and therefore low gasoline prices — aren’t one of them.

Cheap Oil is Killing TSLA Stock, But Not Killing Tesla MotorsThat’s not a premise that will be well received by all investors, many of whom are sure that the most obvious cause-effect relationship is the correct one, and convinced that a company’s stock price always accurately reflects that company’s performance.

If you’re in that crowd, all I can say is, this time, you’re wrong on both counts.

The Flaw in the Assumption

The superficial logic holds plenty of water. That is, if drivers like to save money, and if gas is cheap while Tesla Motors’ electric vehicles are still costly, then drivers will continue to choose combustion-driven automobiles instead of Teslas.

The logic breaks down pretty early on in the thought process for most drivers, however … “if drivers want to save money.” Most anyone entertaining the idea of purchasing a Tesla doesn’t actually care too much about saving money, because they don’t have to worry about it.

As was warned, that’s a premise sure to ruffle the feathers of all those investors who have made bets on a continuation of the currently declining TSLA stock price. Just do some math with me.

Do you know how much the average person spends per year on gasoline? Some investors are surprised to learn the average driver probably spent less than $2,000 on gas in 2015. That’s down from a peak near $2,700 in 2012 … 26% lower, to be specific. Relatively speaking, it’s a lot, but truth be told, that $700 per year difference isn’t game-changing.

Of course, owning an electric vehicle brings the total “fueling” cost down to only about $500 per year, payable to your electric utility provider rather than your nearby filling station. From that perspective, the annual savings of Tesla (or any other electric vehicle) can conservatively reach $1,500 per year, or $7,500 over the typical five-year ownership period for a new vehicle.

Now we’re talking about some savings … or are we?

The cost-effectiveness of an EV is undeniable, if you’re talking about operating costs. The math changes significantly — pointing in the other direction — when upfront costs factor in.

The average price of a Tesla Model X? It starts at $70,000 for a very basic model, and can quickly move to a price nearer $80,000 for the 85-kilowatt version. Subtracting the $7,500 tax credit most buyers qualify for brings the price back down to between the low $60,000s and the low $70,000s. Throw in the $500 per year it costs to charge it, and the five-year cost of ownership rolls in at, let’s just call if $75,000.

The average price tag for most any other car sold in America? As of August, it was $33,500. Throw in $2,000 worth of gasoline costs per year, and the five-year cost of ownership reaches $43,500, on average. Were gasoline prices to reach their more typical long-term average of $2,500 per year, the five-year cost of ownership moves to $46,000 … again, on average.

Respectfully to anyone who thinks that a $31,500 five-year cost of ownership difference (when gasoline is at cheaper current prices) is back-breaking to would-be Tesla buyers but that a five-year cost difference of “only” $29,000 (when gasoline is “normal”) convinces drivers a Tesla is a must-have may want to rethink things.

In other words, the cost mathematics have never favored Tesla or TSLA stock, now or then. Anyone who’s truly done the math has to know this.

It’s back-of-the-envelope math, granted, and doesn’t weigh trade-in value. From a fiscal point of view, though, the residual values of the cars in question wouldn’t change the overall math considerably.

But Tesla is a luxury vehicle, and should only be cost-compared to other luxury vehicles? Fair enough, but the very fact that we’re making a point of limiting the comparison to other luxury automakers makes the bigger point in itself — none of it is about cost. Luxury is about lifestyle, and image, for those who don’t have to worry about costs.

The Real Reason People Own Teslas

Not that Tesla Motors has been satisfactory in all ways all the time to product-rating organization Consumer Reports, but even with last October’s questioning of the Model S reliability, Consumer Reports conceded it was the best vehicle they’d ever seen. It scored so highly on all other measures (like drivability, fuel economy, maintenance costs, cargo space, etc), it literally broke the upper limit of the Consumer Reports 0 – 100 rating scale.

And to be clear, those strong ratings on all facets of the car come from people who actually drove the Model S and had an opportunity to find its flaws. They found few, even in light of its cost.

So then, what’s the ultimate reason consumers buy Teslas? Though few want to admit it, it’s a toy, or a trophy, or both.

That’s not to say Tesla owners aren’t environmentally conscious or aware that gas prices are uber-cheap right now. It is to say, however, they mostly don’t care about those things. If they can afford a Tesla, they can easily afford the gasoline that could have been put into an alternative luxury vehicle. They paid for (and paid up for) the hottest status symbol currently on the market.

As evidence of this idea, one only has to look at last quarter’s total deliveries. Tesla delivered a record-breaking 17,400 vehicles in Q4, yet gasoline prices last quarter were the lowest they’ve been in years.

If cheap oil really is a problem for Tesla Motors, why is it able to sell record numbers of its electric vehicles in the midst of this massive oil glut?

The obvious answer is the correct one: Of all the things that could impact Tesla, low oil prices is the least of them. The biggest battle TSLA stock is facing right now is perception — or more accurately said, misconception.

Bottom Line for TSLA Stock

Just for the record, I fully acknowledge I’ve been a critic of Tesla more often than not, and I still see some concerning headwinds brewing. On this one particular issue though, I’ll come to the company’s defense armed with truth — there’s absolutely no empirical evidence that low gasoline costs have proven to be a problem for the company. And if there was going to be any such evidence, it would have materialized by now.

So why has the Tesla stock price been under attack?

That’s the inherent problem with story stocks. When traders put it on a pedestal and there’s even a whiff of trouble, the pedestal gets kicked out from underneath it.

Give it time. If nothing else, the same misguided thinking that’s sending TSLA shares lower now will send them higher again once oil prices start to rebound later this year.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/cheap-oil-tsla-stock-tesla-motors/.

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