Tesla Inc Stock Needs an Alliance to Stay Ahead of the Pack

TSLA stock - Tesla Inc Stock Needs an Alliance to Stay Ahead of the Pack

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Although I used to be bearish on Tesla Inc (NASDAQ: TSLA), I’m coming around on TSLA stock. I believe that the recent decision by many countries to further incentivize electric car sales could enable the company to justify and ultimately significantly exceed its current high valuation.

But in order to do so, I think the automaker must form an alliance with a much larger competitor.

The sales of electric cars will skyrocket in many countries as governments radically step up their efforts to incentivize the purchase of such vehicles, in some cases by eventually banning the production of new vehicles with internal combustion engines. But Tesla’s production problems look poised to leave it unable to exploit this great opportunity.

For example, let’s say that worldwide demand for electric cars reaches 200,000 per month by January 2019, up from a little over 90,000 per month as of the third quarter of 2017. If Tesla can make only 6,000 cars per week in January 2019, up from its Q1 goal of 5,000 per week, its sales and profits will of course not benefit very much from the surge in demand. Certainly that won’t help TSLA stock.

Losing First Mover Advantage

Even more important, there is a high likelihood that Tesla would largely lose the first mover advantage to its competitors if it continues on its current course.

As many hundreds of thousands of consumers in Europe and China get used to buying electric cars from Tesla’s competitors like General Motors Company (NYSE: GM), Germany’s Daimler AG (OTCMKTS:DDAIF), and China’s BYD Company(OTCMKTS:BYDDF), Tesla will become an afterthought for many  electric car buyers.

Consumers tend to stay loyal to the brands that they have utilized in the past, so Tesla will likely get left by the wayside as consumers become devoted to its competitors, preventing it from ever justifying the high valuation of TSLA stock.

Moreover, a longtime automobile sector stock analyst , writing recently in Forbes, stated that “Tesla can’t produce cars in the needed volume to hit its gross margin target of 25%, and the amount of re-work needed just to produce a salable Tesla ensures that target is illusory as Tesla enters the mass-market.”

He added that, “Tesla is not a sustainable enterprise from a manufacturing standpoint” and suggested that the company will continue to burn many hundreds of millions of dollars of cash per quarter if it continues on its current course,

But there is a way for Tesla to solve these problems. It can form an alliance with a larger, more experienced competitor that has more available cash.

TSLA stock Benefits from a Partnership

Ford Motor Company (NYSE:F) would be a good potential partner for Tesla. Unlike GM, Nissan Motor Co Ltd (OTCMKTS: NSANY), and even Toyota Motor Corp (NYSE: TM), Ford’s brand is not associated at all with electric or hybrid vehicles. Also, Ford lacks the strong luxury brand of companies like Daimler and BMW.

By partnering with Tesla, Ford could quickly get a piece of the electric car and luxury markets that it would find difficult to penetrate otherwise.

Meanwhile, Ford should be able to help solve Tesla’s production problems.  Ford had over 200,000 employees as of 2016 and had “total liquidity” of $35 billion as of the end of the third quarter of 2017, versus Tesla’s “over 33,000 employees” and $3.5 billion of cash and cash equivalents at the end of the third quarter of last year.

By combining Ford’s cash and manpower with Tesla’s expertise, the companies should be able to solve Tesla’s production issues, which would put TSLA stock right back on track.

Given Tesla’s sky-high valuation, larger automakers like Ford may not be interested in buying a stake in the electric car maker. But perhaps a large automaker would agree to help Tesla out in exchange for receiving a percentage of the revenue from each Tesla sold for a five year period.

Or maybe a special deal involving a new class of TSLA stock could be worked out.

In any event, such a deal would clearly benefit both parties, as Tesla would be able to make more progress towards solving its production problems and hold onto its first mover advantage,  while the larger automaker would get a huge piece of  the surging electric car market.

If Tesla does make such a partnership deal, investors should buy TSLA stock, as the company will be able to exploit the huge upcoming migration towards electric cars in many countries and become one of the world’s top automakers.

If Tesla does not make such a deal, however, investors should avoid TSLA stock, as there is a good chance that the company will lose its first mover advantage, derailing its ability to justify its very high valuation.

As of this writing, Larry Ramer did not hold shares in any of the companies mentioned. 

Article printed from InvestorPlace Media, https://investorplace.com/2018/01/tsla-stock-needs-alliance/.

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