An in depth look at the state of Tesla Motors

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tesla Motors (NASDAQ: TSLA) made a name for itself redesigning the electric car from something that looked like a science fair project to this…

<img src="/media/images/user_21/tsla-roadster_large.jpg" />

…A sporty, yet eco-friendly, luxury coupe that can deliver 0-60 mph in 3.9 seconds.

But, there was more than just the cool cars to be excited about when the stock debuted.

The founder, CEO, and product architect of the company, Elon Musk, was a bit of a dynamo.  The director of Iron Man, John Favreau, said in an interview Elon served as the inspiration for the character of Tony Stark, the eccentric-genius-billionaire-inventor-prodigy of the movie.

Elon’s prior resume included founding PayPal, which he sold to eBay for $1.5 Billion. He also founded SpaceX which designed the successor to the Space Shuttle, and creates different grades of boosters for both satellite launches and potential deep space Mars missions.

With a resume like that, more than few people were willing to take out bets on the company.  Tesla’s stock quickly peaked 75% above its IPO price to $35 per share within 5 months.

However, the honeymoon seems over.  The stock now sits at $28 a share, and a majority of the shares available in the float are short the stock.  Shorts have slowly crept in to the stock, and short interest is at a full 30 days to cover under normal volume.

<img src="/media/images/user_21/shorts_large.jpg" />

In addition, the stock was downgraded in early December by Morgan Stanley.

Where did the love go?

For starters, the Tesla Roadster was taken for a fateful test drive on the British car-enthusiast and comedy show Top Gear.  Their review includes:

-British people

-British humor

-The Roadster delivering a range of 55 miles on a full charge

-Their calculation of a 16 hour charge time for the Roadster

-The Roadster’s poor handling, much worse than a sports car in the same price range

-The Roadster going really fast on a straightaway

The clip is incredibly controversial.  The overall review is negative, and since Tesla does no advertising, media spots like these have been their sole source of brand building.  Sales of Roadsters plummeted in a material fashion in the UK after the clip aired.  Tesla doesn’t believe the Roadster was portrayed factually and is pursuing legal action.

At this point the lawsuit is just about saving the Tesla brand, not about saving the Roadster.  The company decided to halt production of the Roadster in August.  They had sold just 1,650 units.  Instead, they are going to focus on a more affordable family sedan called the Model S.  With the S starting at $49,000, and being a sedan instead of a sporty coupe like the Roadster, it is going to have to compete with the likes of Toyota’s (NYSE: TM) very popular Prius, which is starting at just $23,520, and the Chevrolet (NYSE: GM) Volt.  At least it is better looking than both of those:

<img src="/media/images/user_21/model-s_large.jpg" />

The downgrade in early December by Morgan Stanley cited concerns about the electric vehicle market being much smaller than anticipated.  Chevrolet would agree with that statement.  They had a sales target of 10,000 Volts this year, but were only able to sell 6,500. 

None of that is good news, because Tesla is really banking on the Model S to make them profitable by 2013.  Profitability has to happen fast.  Last quarter, the company booked revenues of $58M but blew through $178M in operating and investing activities.  Continued lack of earnings has saddled the company with a debt to equity ratio of 76%. 

The company has plans to launch an SUV style all electric car called the Model X as well.  But if the Model S flops on launch, they may not be able to find the cash for a successful launch of the Model X.

Tesla does have some strong strategic partnerships with Toyota, and Daimler.  Both companies may be a source of cash down the line, particularly Daimler, which has a 10% equity stake in Tesla.  At the current moment, these partnerships are not contributing enough to keep Tesla in operation.  Barring some sort of new deal with these two or another large auto manufacturer Tesla’s survival will hinge on their car sales.

So can the Model S succeed, or have other automakers already saturated the market?  Is there even a viable market for electric cars?  Tesla certainly deserves credit for pushing the idea of electric cars and making them more popular than ever, but is it finally time for the idea to catch on?

To answer that question, let's look at some pictures from another electric car manufacturer from California from the early '90s.

<img src="/media/images/user_21/zebra5_large.gif" />


<img src="/media/images/user_21/electricar_large.jpg" />

You've probably never heard of those cars so you can guess how it went.  Maybe this time it's different?  I'm skeptical.

Not only are consumers deeply ingrained in the habit of spending only a few minutes to refuel a car that will drive for hours, but there is something lurking in the back of my head that anyone with an electric device can relate to.  

The batteries that fuel the car are supplied by Panasonic Corporation (NASDAQOTH: PCRFY) and are the same as laptop batteries.  Anyone who has owned a laptop know the batteries don't last forever, they last a few years at best, nothing approaching how long many people are used to keeping their cars.

As excited as I am to see Tesla advance electric cars this far, I just don't think the company's is viable.  I see little evidence large automakers will come to their rescue with a buyout or capital infusion, as the electric vehicles market has chilled substantially.

The author does not own any financial interest in the company mentioned.  Forward looking statements in the article are the author's opinion, and no guarantee can be provided of their future validity.

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