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Tesla’s moment of truth is almost upon us

The Age, 14 March 2016
“This year and next year will be critical”. That’s what Denver based portfolio manager Brandon Geisler, from $US6 billion ($8 billion) fund manager Marsico Capital, told me on a recent visit to Sydney about Tesla Motors, a company he happens to be intimately familiar with. Gesiler and Marsico have been visiting Tesla since before its initial public offering in 2010, and there were early shareholders in the business.

Since then, Elon Musk’s electric car (and home battery) maker has captured the imagination of everyone from the climate conscious to auto enthusiasts and investors (its shares are up nearly 1000 per cent since the IPO). But we are finally getting closer to the point where it will have to deliver on more of its promise – and literally, more of its cars.

At the end of the month, Tesla is poised to unveil its eagerly anticipated Model 3 – the car that is supposed to take it out of the realm of rich, technology types and further into the mainstream.

In the US, the sticker price for the new car will be $US35,000 – it could be even cheaper in states with incentives for electric vehicles – compared to around $US70,000 for its existing flagship, the Model S sports car (which is a thing of automotive beauty, trust me).

“From our perspective, that could be an incredibly successful period for the company,” says Geisler. “You could have 50,000 to 100,000 reservations for that car [the Model 3]”. This compares to total sales of about 100,000 units for the Model S since 2012.

It remains to be seen how much the Model 3 will cost in Australia. Tesla’s Model S starts at $111,000 in this country, where, astonishingly, there are no subsidies for electric vehicles, and it is subject to the luxury car tax. (The Model 3 will probably fall under the threshold for that tax).

Anyway, the release of the Model 3 comes at a very interesting time for Tesla. The stock sank to a two-year low in February, and is down about 15 per cent this year amid wider jitters over loss-making growth stocks, but also because the company has been literally unable to deliver as many of its Model X SUVs as people had expected.

Geisler, for one, no longer holds the stock. He isn’t concerned about Tesla’s technology or, broadly speaking, demand for its cars, but rather its ability to produce and deliver them. Mass producing automobiles is no simple feat, and Tesla, which is also in the process of building its own $US5 billion lithium-ion battery plant, has suffered repeated production issues.

There is at least one other reason to be cautious, according to Geisler. “You know the unicorns that are blowing up in the Valley? We can’t help but think that some of those unicorn seed investors turned around and bought a Tesla as their car. We just don’t know that plays out.”

He is not alone in having doubts. Following its quarterly earnings last month, JPMorgan analysts warned that Tesla’s “expansion into higher volume segments with lower price points seems fraught with greater risk”. Meanwhile, rival automakers, who initially dismissed all electric cars, are now taking serious steps to respond to the Tesla threat.

Yet, history has shown that it is stupid to bet against Elon Musk.

The Model S is now the biggest selling large luxury car in the US, accounting for 25 per cent of sales in that category last year. And despite advising clients against buying shares, even JPMorgan praised Tesla’s “leading-edge technology” and its “visionary leadership.”

If production and scaling issues can be overcome (and that’s a big if), it would seem the only question is how big Tesla can get.

“It’s only at the beginning of the S curve,” says Geisler of demand for Tesla’s electric cars. “If you go back and look at [consumer adoption of] televisions or fridges or phones, once you hit the inflection point, it just accelerates. We are still in the bottom half for Tesla.”