Is the Tesla Model S a Car? Is a Rolex a Watch?

Yes and Yes. But I think most observers would agree that a Rolex is much more than a time piece. For some it may be a fashion statement, a status symbol, a store of value, or something else. At a time when wearing a watch seems to be giving way to personal time keeping by smart phones there must be other reasons for the boom in high-end time pieces.

How is this relevant to the Tesla phenomenon? Clearly, the Tesla Model S is an exceptional automobile with widespread critical acclaim. It may well be the most talked about vehicle on the planet. Demand exceeds supply as the company’s current ability to produce vehicles appears to something less than 2,000 per month. Who is buying these vehicles and why?

According to Edmonds.com, 33% of Model S buyers are 18-44 years old and 51% are 45-64 years old. Moreover, more than three quarters of buyers have an annual income of more than $100,000.

That’s the who, the why is more difficult. Are buyers simply early adopters, or individuals who want to be the first kid on the block with a new toy or is this the beginning of a trend which changes the way we think about personal transportation?

Investors, as differentiated from car buyers, should carefully consider the reasons for the Tesla phenomenon. The Tesla is clearly a very good automobile, as verified by independent sources. It competes, in terms of price and performance, with a broad range of very good $100,000 plus, low volume vehicles with conventional power trains. It also competes with an increasing number of plug-in and hybrid electric vehicles, substantially all of which are much cheaper but generally not nearly as highly rated.

Other key issues for investors include: the long-term outlook for electric vehicles; Tesla’s ability to increase volume in a meaningful way, while maintaining margins; and aggregate, industry demand for relatively expensive specialty vehicles. (Recent industry data suggests that the average price of new passenger vehicles in the US is just over $31,000 compared to an average retail price of the Tesla Model S of approximately $90,000.)

The car business is very competitive. History has shown that it relatively easier to develop limited production, high-end vehicles, think DeLorean and Bricklin, than competitively priced mass market automobiles.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA