Skip to main content
strategy lab

Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

In the past few months, the price of crude oil has been slashed almost in half. This has translated to gas prices in the Toronto area dropping well below one dollar a litre, compared to recent highs of about $1.30. During this drop, one of my Strategy Lab growth stocks, Tesla Motors Inc., a maker of premium electric vehicles, has also seen its share price drop substantially. I added the shares to my model portfolio in November 2013 around $120 (U.S.) a share. It climbed to a high of about $290 by September before starting to nosedive, just as the price decline of oil started to accelerate.

Does cheap oil really disrupt the business case for electric cars? I see this as another classic example of where long-term thinking pays off. I'm not certain that Tesla will continue to be a winning stock, but volatility around oil prices is not high on my list of concerns. Today, Tesla only sells an electric sedan, the Model S, with a starting price of about $70,000 (U.S.) and an average selling price more like $100,000 since Model S customers tend to buy lots of upgrades. While Tesla drivers enjoy battery charges at a fraction of the cost of gasoline, the cost of the car makes it prohibitive for most people. If expensive oil wasn't driving buyers in the first place, cheaper oil isn't driving buyers away now.

Instead, the biggest impediments to demand are vehicle price and convenient recharging options. I'm much more interested in how these variables change long term, especially since they are controlled by engineering and seem more predictable to me than oil prices.

In the next three to four years, Tesla aims to release a smaller sedan called the Model 3 with more than 320 kilometres of range and a starting price of about $35,000. Keep in mind this is a goal and not a guarantee. But if it happens, Tesla would be able to compete on price with a BMW 3-series with a car that would cost less to drive and maintain. It should also have better performance because of the radically quick acceleration that comes with an electric drivetrain.

Now, let's think even longer term. Batteries are by far the biggest cost factor in an electric drivetrain. Based on expected battery cost declines coming in the next decade, I believe electric cars will become as cheap to manufacture as gas cars. And depending on what happens to the price of oil, they'll likely still be cheaper to drive. And regardless of the price of oil, they'll still be quieter, cleaner, faster to accelerate and cost less to maintain.

To be clear, I'm not saying oil prices are irrelevant, but I am saying the cost and convenience of electric cars is much more relevant and much more likely to change dramatically in the coming years. Tesla won't be alone in the market. Audi, BMW, Mercedes, GM, Ford and others are investing in electric-car technology. I think there is room for many successful brands. But Tesla is far ahead in building long-range cars, a global network of fast charging stations called "superchargers" and building a supply chain to ensure adequate battery availability.

Tesla's $30-billion market capitalization can't be supported by the Model S alone or even with the Model X SUV expected several months from now. There is a limit to how many $100,000 cars they can sell around the world. But if they manage to build the world's biggest battery factory and reach anything close to the $35,000 starting point they're shooting for on the smaller Model 3 sedan later this decade, I think there is still substantial upside in the stock. And that doesn't even begin to factor in the potential of Tesla's separate energy storage business. But suffice to say, the Tesla story is about more than oil prices and more than electric cars.

Disclosure: The author also holds TSLA shares personally and owns a Tesla.

Follow us on Twitter: @globeandmailOpens in a new window

Report an error

Editorial code of conduct

Tickers mentioned in this story

Your Globe

Build your personal news feed

Follow the author of this article:

Check Following for new articles