Minneapolis analyst who saw iPhone's promise goes all in on Tesla's Model 3

Gene Munster thinks Tesla may have a hit with its new Model 3 sedan.

The Minneapolis tech analyst-turned-venture capitalist said Thursday that the new model will be less expensive to own than most people think and may appeal to more buyers than investors and competitors believe.

The $35,000 car, which is scheduled to roll off Tesla’s California assembly line for the first time on Friday, marks the 14-year-old company’s first attempt to reach mainstream buyers. Until now, it produced a roadster, sedan and SUV at prices starting at $70,000.

Munster, founder of Loup Ventures and former technology industry analyst at Minneapolis-based Piper Jaffray, compared the likely cost of owning a Model 3 to an entry-level Toyota Camry, one of the nation’s top-selling sedans, and found that the Tesla’s overall costs would be just 13 percent greater over a five-year period.

While the Toyota, at $26,700, is less expensive, its fuel costs over the ownership period will be greater than the costs to charge the Tesla. Lower repair and maintenance costs also benefit the electric vehicle, he said. On Camrys that have more features and are more expensive, the difference in total ownership costs would shrink more and may tilt in favor of the Tesla.

In his report, Munster compared the launch of Tesla’s Model 3 to the turning-point that happened 10 years ago at Apple Inc., the company he followed closely for years at Piper. “We believe we will eventually look back at the launch of the Model 3 and compare it to the iPhone, which proved to be the catalyst for the shift to mobile computing,” Munster wrote.

He added that the consensus among auto analysts is that Tesla’s potential market in the U.S. is 1 million to 4 million customers. “However, based on our cost of ownership work, we believe the Model 3 expands Tesla’s addressable market to about 11 million vehicles per year in North America alone,” Munster wrote.

That’s essentially the entire U.S. car market and more. Americans bought about 17.6 million new cars and trucks last year, a record, with more than half of that figure light-duty trucks and SUVs.

In an interview, Munster said he decided to study Tesla’s business in part because of its likely effect on companies, like Apple and Google Inc., that he has long followed. Both companies are investing heavily in automotive technology and may ultimately compete with Tesla in certain areas. Google’s Waymo division and Tesla are early leaders in self-driving technology.

“The simple answer is I’ve always wanted to cover Tesla and never had a chance to. It wouldn’t fit within our space” covering technology at Piper Jaffray, he said. “Now I have the opportunity to do that.”

He said he was surprised at the long-term cost advantages electric vehicles like the Tesla Model 3 present to car owners. He noted that his cost analysis was conservative and did not include the tax incentives buyers may get or the prospect of higher resale value at the end of ownership.

“The part that I did not appreciate was insurance being less and, separately, the repairs,” Munster said.

He added that the transition to electric vehicles is still early, with Tesla having sold only 47,000 vehicles this year. “I think it’s going to become more apparent to people the benefits of electric cars,” Munster said.

Tesla shares, which are up 44 percent this year, lost value this week in part because of announcement by Volvo, the Swedish automaker, that it will shift away from traditional combustion engines to a combination of electric and hybrid engines in all its cars in 2019. Investors took that move as a signal that major automakers are starting to think more aggressively about the shift to electric vehicles.

Munster said that even with pressure starting to build from other carmakers, Tesla has a significant lead in developing components and from-the-ground-up factories for electric vehicles. Tesla, he added, also leads other manufacturers in the race to self-driving vehicles. It promises to upgrade the Model 3 and its other vehicles with self-driving features in the future.

“That’s the other part that’s almost comical when you compare a Model 3 to a Camry: the Model 3 is going to be autonomous in two to three years,” Munster said. “It’s hard to believe, but in that case, we’re talking about a feature gap that’s so wide it’s hard to measure.”