What Does Elon Musk Envision That Justifies Tesla’s Stock Price?

Tesla Motors, Inc. (NASDAQ: TSLA) is much more than just an electric car company with an eccentric leader. Many analysts have written off Tesla Motors as just another flash-in-the-pan electric car company that will soon fade away and join the trash heap of bygone car companies. What they have gotten wrong is that they have failed to figure out what Tesla’s visionary leader, Elon Musk, really has in store for his company. Once one understands that the future of Tesla is much more than their sleek award-winning electric cars, the excitement that many have for Tesla’s future becomes crystal clear. Tesla has big plans for the future that will likely change the way everyone lives. Elon Musk’s vision extends well beyond electric cars and into the heart of what makes modern societies run.

In reaction to oil price shocks that occurred over the years, various attempts have been made by a wide array of companies to develop usable electric cars that have the performance and range needed for typical driving needs. The problems that have yet to be solved when it comes to making practical electric cars include the cost of the cars, the driving range between recharges, and the time that it takes to recharge an electric car’s batteries. Up until now, electric car batteries and their recharge rates have simply not been suitable for real-world driving conditions, and their cost has been out of reach for the majority of drivers.

Under the guidance of Elon Musk, Tesla has set out to deliver electric cars that have the performance, range and re-chargeability speed that makes them appealing to consumers that are accustomed to the driving range and refueling convenience provided by internal combustion engine cars. As far as performance goes, nobody can argue that Tesla has not achieved its goal. Their electric car offerings have won numerous accolades and awards for their sleek designs, innovative driver controls, safety, and most importantly, their ability to accelerate from 0 to 60 miles per hour at a remarkable rate.

Tesla’s luxury Model S sedan provides a driving range of approximately 240 miles per charge and can be recharged to 80% in thirty minutes, using Tesla’s proprietary Supercharger technology that is available at an ever-expanding network of public charging stations. By comparison, their standard chargers that car owners typically use at their home or office take about five hours to charge the Model S to 80%. To be competitive with internal combustion engine cars, Tesla needs to develop reasonably priced electric cars that have a rage of range of at least 200 miles per charge and can be recharged quickly.

With an eye always on the future, Elon Musk has plans to broaden the reach of Tesla’s electric vehicles to the masses through the soon to be available Model III, which will have a range of approximately 200 miles per charge and will be sold at a more affordable cost of approximately $35,000 per car. That may sound expensive, but when you factor in the government incentives offered to electric car buyers and the lower operating and maintenance costs, Tesla’s Model III will be cost competitive with gas-powered sedans, such as the Honda Accord and the Ford Taurus.

Tesla’s cutting-edge electric cars are only part of the Tesla story. A part that misleads people into thinking Tesla’s future success is dependent upon the success of their electric cars. A look deeper at Elon Musk’s vision for Tesla reveals why some believe Tesla will change the way we live, while benefiting financially in a tremendous way.

Elon Musk has much larger ambitions than just changing the automobile industry by producing the first practical electric cars that gain mass appeal. Musk is aiming to remake and profit from a far larger market: the energy market that powers modern economies.

Tesla rocked the world with their announcement in September 2014 they will build a “Gigafactory” in the United States State of Nevada that will produce lithium-ion batteries on an enormous scale. Tesla announced in November 2015 that their second “Gigafactory” will be built in Germany, while plans for an Asian version of the “Gigafactory” are also in the works.

While their “Gigafactories” will allow Tesla to meet its goal of reducing the cost of batteries for their electric cars by at least 30 percent, the big revenue potential when the “Gigafactories” are fully operational actually lies with the sale of battery energy storage systems that store electricity for later use.

In May 2015, Tesla revealed a line of battery energy storage systems that are capable of storing energy for homes, buildings, and large utility-scale applications. The version for homes and small buildings is called the Powerwall. It is a relatively thin piece of equipment that can be mounted on the wall of a garage. The Powerwall will be available in five colors to match interior designs and is expected to sell for $3,000. The large utility-scale version of Tesla’s battery energy storage systems is known as the Powerpack. It is contained in a steel box that is eight feet in height and is expected to sell for approximately $25,000. These batteries may sound pricey, but they are roughly half of what other companies are charging for similar battery energy storage systems, and if used properly to save on electricity costs, can pay for themselves over time.

Tesla Motors, Inc.’s stock (NASDAQ: TSLA) has raced higher since it started trading publicly in June 2010, gaining over 500% percent. It now trades at a lofty price of over $200 per share. While such a high stock price may make some investors concerned, Tesla’s entry into the battery energy storage systems market may justify an even higher stock price in coming years, as revenue growth accelerates.

The potential market for battery energy storage systems that can power homes, buildings, and serve the needs of electric utilities is enormous. Analysts project that the battery energy storage systems market is expected to grow by approximately 1,600% over the coming years, from just under $0.50 billion in 2014 to approximately $8.50 billion in 2024. If Tesla is able to capture a large portion of this market, it is easy to conclude that the revenue and potential earnings growth for Tesla will be tremendous over time. This high rate of growth should support a higher stock price for the company’s stock through 2024 and well beyond. The total world-wide long-term potential revenues from battery energy storage systems is estimated at an astounding $50 trillion by analysts who follow the energy space.

Why are Tesla’s battery energy storage systems such a big deal? They fill a void in the electricity supply market: the need to make renewable energy available any time of the day or night. One of the main obstacles to adoption of solar and wind generated electricity is its intermittent nature. If the sun is not shinning or the wind is not blowing, no electricity is being generated. Tesla’s battery energy storage systems are a game changer in this regard. For a modest amount of money, a homeowner, building owner or utility can store electricity generated via solar or wind for later use, when needed, day or night, rain or shine. Alternatively, electricity provided by the grid can be stored when electricity rates are lower during non-peak times, then used when electricity rates are higher during peak times.

One of the more interesting side notes regarding Tesla’s development of practical electric cars and battery energy storage systems that can capture solar energy for later use is the reality that this combination provides consumers the ability to drive cars that are powered 100% by renewable energy. For any consumer who dreamt of the day when they could kiss the oil companies goodbye and stop using gasoline to power their car, that day is here.

A homeowner or building owner does not even need to spend a fortune to go solar. SolarCity Corporation (NASDAQ: SCTY), which Elon Musk serves as Chairman for, provides electricity consumers the ability to install solar power systems on their roofs for free, with payback over time through a lease agreement. Even if one cannot install a solar power system on their home or business, they can easily purchase solar or other 100% renewable power from third-parties through their electric utility and drive using renewable energy.

As of 2015, the United States only obtains 1% of its electricity from solar methods. Elon Musk thinks Tesla’s Powerpacks can make solar energy so practical that it can be used to provide all the electricity needed in the United States, when it is needed, not just when the sun is shining.

To put things in perspective, Musk used the city of Boulder, Colorado, with a population of 103,000 as an example. Per Musk, if Boulder installed 10,000 Powerpacks and charged them with solar panels, enough electricity would be available for 100% of the city’s electricity needs. For the United States as a whole, 160 million Powerpacks charged by solar panels would be needed to achieve 100% solar derived electricity. Not one to think small, Musk takes it even further, estimating that 2 billion Powerpacks obtaining their electricity from solar panels would be needed to eliminate the need for fossil fuel derived electricity around the world. A big task and one that Musk and Tesla would benefit greatly from, if implemented.