10/1/2012
By Charles Payne

More Articles by Charles Payne

Fanciful Facades?

Toyota (TM) will stop development of its eQ electric car admitting electrics "do not meet society's needs" and point out several key factors.

> Distance on a charge
> Costs
> Time to charge batteries

In related news, it was revealed that a record 2,800 Volts were sold in August and helped dramatically by a $10,000 discount on top of government $7,500 rebate as well as some state incentives.  Unless General Motors (GM) can persuade the Obama administration to sell its stake, it will not have the luxury of putting the electric car dream on hold. In the meantime, losses mount, and with the additional incentive, come to approximately $35,000 per Volt sold. 

But there is room for success in electric and it gets back to Toyota's reasoning for putting it on hold.  The pool of legitimate buyers is too small for mass production but large enough for Tesla Motors (TSLA) to become a real player in the auto space.

The company has begun deliver of the Model S (its signature series is already sold-out in America) and the Roadster inventory will sell out this year.  In addition there is the Model X SUV with falcon wing doors that has auto enthusiasts salivating.  I'm pumped, too!

This is a niche market that's too small for big boys but perfect for that pocket of buyers that will not fret over costs, distance, or charging times as these wouldn't be their only driving choice. (An industry insider says given all the costs associated with production of batteries, charging stations etc., gasoline would have to hit $8.00 a gallon before these cars made sense for the masses.)

Investment Opportunity

Next year management sees $600 million in revenue and gross margins of 25% from 18% in 2Q12. The stock is expensive by traditional valuation metrics and the shorts attack like packs of hyenas every time shares rally.  Right now, close to 50% of the float is short which means good news could spark a major squeeze.

Technically the stock breaks out with a close above $32.50 from there have potential to $38.00. 

Update

On September 25, a series of news from the company sent investors looking for cover.  Tesla is raising $130 million which means more dilution of ownership.  That news coupled with disappointing updates on production and signs of frustration via reservation cancellations hit the stock like a ton of bricks.  The bears were all over the place, but when the session was over, the damage wasn't as worse as feared.   And today the stock is bucking the overall trend of the market and edging higher.

There is no doubt the company faces major challenges:
> How does it fund a network of charging stations (Boone Pickets has spent millions trying to get the federal government to back a network of natural gas filing stations)?
> How long before it gets past the learning curve and has seamless production?
> How long will Elon Musk be smitten and not drift further into the space project and other endeavors?

Still, Maxim reiterated its belief in the company and share price target of $50.00.  The stock has support at $27.00 if that failed then it could go much lower but that said those willing to hold through the ups and downs could eventually make a big payday - but it is going to be a wild ride, not nearly as smooth as a ride in the Roadster.

Charles Payne
Wall Street Strategies