Featured | Jul 9, 2010 | 0 Comments

Tesla Motors—Stock Power Outage?

Can The Stock Go 0-60 in 3.7 Seconds?

All this week I’ve been hearing a lot about Tesla Motors (Symbol: TSLA) and their nice-looking EVs (snazzy way of saying electric vehicles). Cool looks aside, does this stock have anything under the hood?

Despite the prospectus discussing possible sales growth, there’s more competition on the horizon. TSLA reached a high of $30.42 per share on June 30 and closed trading on Friday, July 9, 2010 at $17.40.

Fast Facts

Tesla Motors offers two models.

The Roadster (pictured) can be bought for $101,500 or leased at $1,658 per month—both prices include a $7,500 tax incentive. It goes 0-60 mph in 3.7 seconds, has no tailpipe emissions and will go 245 miles per charge.

The Model S isn’t being delivered until 2012, but the base price is listed as $49,000 after the $7,500 tax credit. It gets 300 miles per charge and also has no tailpipe emissions.

There’s also talk (in their prospectus) about offering a 3rd model that’s more affordable.

Consumer Outlook

If history has taught us anything, it’s that consumers look at their wallet first. While switching to an EV makes sense for environmental reasons, is it economical compared to what consumers already have?

The main different is the fuel source and cost. According to the U.S. Bureau of Transportation Statistics, the average fuel consumption per vehicle is about 700 gallons per year. If you look at the 2008 numbers, it actually says 667, but these figures keep getting revised and they are usually revised to around 700.

According to the Department of Energy, the average price per gallon of gas in the US has ranged from $1.60 – $4.10 per gallon over the past few years.

Using the average cost for a gallon of gas ($2.85), the initial savings from not having to buy gas is $1,995 annually.

But here’s the rub. EVs don’t run on air. You have to plug them in somewhere, which means you’re paying for “fuel” one way or the other.

Chevrolet—launching their Volt EV soon—estimates that an owner who drives under 40 miles per day will spend approximately $1.50 daily in operation costs.

Nissan’s Leaf gets about 40 miles per $1 in electricity according to their interactive iPhone 4 ad.

Even with the difference between EV models, the average consumer should see a “fuel” savings of at least 50%.

Fundamental Facts

On the fundamental side, Tesla provides vehicles for people who are a little more well off financially. The majority of consumers, especially given the economy, aren’t going to spring for a $50,000 – $100,000 electric vehicle. What will Tesla’s profit margin be on lower-end vehicles?

While the company does plan to target average consumers, they will be behind other competition that’s already ready to launch. Nissan’s Leaf will cost about $32,000, but this is before generous tax incentives, which drops the price to a more attractive $25,000 range. Pricing for the 2011 Chevrolet Volt hasn’t been announced, but expect it to be in the same range.

And both of those auto makers are better equipped to profit on cars under the $40,000 price range.

In viewing the promotional materials for Tesla, a “blue-collar vehicle” doesn’t fit their company’s operation style. They are more of a small luxury boutique.

The company has been around since 2003 and it has sold 1,063 Roadsters to customers in 22 countries. There are 12 stores in North America and Europe. Even though their prospectus touts 2,200 pre-orders for the Model S (a $5,000 refundable deposit was required), what happens next?

At present Tesla is trading at a loss (-$30 million MRQ) and this isn’t likely to change (see the end of this article for quotes about Tesla’s expectations).

As a potential investor, here’s my problem. To reach the mainstream consumer market, Tesla must rely on government intervention, regulation and incentives. But these things won’t solely benefit Tesla. They will also open doors up for companies with larger customer bases, better delivery capabilities and deeper development cycle penetration, like Chevrolet, Nissan, Toyota, etc. It’s worth noting that Toyota owns a small stake in Tesla now.

I’m also concerned about actual demand. Desire and the ability to complete the purchase are two different things. Currently, there’s a hefty federal tax credit that’s fueling sales. In California, it’s possible to get more government money, reducing the cost of the Nissan Leaf to about $21,000. Tesla will have a hard time competing in this environment. More importantly, what will happen when the tax credit ends? Will it be like the housing market where sales fall off a cliff?

Tesla may very well grow to be a profitable company with a good stock, but that time could be years away. And the stock may still be rightfully priced lower than it is today. The situation is too forward looking and wishful right now.

I’ll leave you with a few quotes from Tesla’s prospectus:

“We have a history of losses and we expect significant increases in our costs and expenses to result in continuing losses for at least the foreseeable future.”

“Our future growth is dependant upon consumer’s willingness to adopt electric vehicles.”

“We are dependent upon our ability to fully draw down on our loan facility from the United States Department of Energy, which may restrict our ability to conduct our business.”

“We anticipate that we will experience an increase in losses and may experience a decrease in automotive sales revenues prior to the launch of the Model S.”