Tesla Motors: Are Electric Vehicles a Possibility or Inevitability?

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Everything about Tesla Motors (NASDAQ: TSLA) defies current conventions.

It sets up shop in Silicon Valley, not Detroit. It builds electric vehicles, not gasoline-powered ones. And it believes that a future with purely electric vehicles is not only a possibility, but an inevitability.

Tesla CEO Elon Musk once claimed that entrepreneurship is like “eating glass and staring into the abyss of death.” Many loyal Tesla shareholders echo his sentiment.

In the nine years since Tesla’s founding, and the two years since it’s been publicly traded, Tesla has yet to produce a cent in profits. The company’s negative free cash flow, rising expenses and soaring debt could lead it straight to bankruptcy unless it can finally show the market that its business model can be profitable.

<img src="http://media.ycharts.com/charts/7434ef12be0174f00b7a79429a6dce2a.png" />

TSLA Revenue TTM data by YCharts

Yet despite all these odds, 2013 could be the year that Tesla finally turns a profit.

The Niche Market

Tesla’s luxury electric vehicles cater to a niche market - wealthy, environmentally conscious clients who are willing to purchase its vehicles despite the lack of a viable public charging infrastructure. That keeps owners from taking cross-country road trips, and restricts them to using the vehicles for short-range urban trips.

Larger automakers such as General Motors (NYSE: GM), Toyota and Nissan all see electric vehicles as a possible future, but have shied away from mass producing all-electric vehicles, opting for more marketable hybrids instead.

By contrast, Tesla has never shied away from the unconventional or audacious - its flagship Roadster, which retails for $109,000, is modeled after the iconic Lotus Elise.

Last November, Tesla posted a third-quarter loss of $110.8 million, nearly double the $65.1 million it lost in the prior year quarter, and wider than analyst forecasts. Tesla also used a secondary stock offering to generate $222 million, bringing its total cash reserves back up to $300 million. However, it is still shouldering $474.51 million in debt.

The Model S

However, net losses and rising debt levels aren’t a big surprise for Tesla investors. They were more interested in Tesla’s production schedule for its upcoming Model S sedans, its more affordable mainstream model priced between $60,000 to $80,000, which was named Motor Trend's 2013 Car of the Year. It comes in three models, all with exceptional range for an all-electric vehicle. 

<table> <tbody> <tr> <td> <p><span><span><span><strong>Battery</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Range</strong></span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span>40-kWh</span></span></span></p> </td> <td> <p><span><span><span>160 miles (260 km)</span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span>60-kWh</span></span></span></p> </td> <td> <p><span><span><span>208 miles (335 km)</span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span>85-kWh</span></span></span></p> </td> <td> <p><span><span><span><span>265 miles (426 km)</span></span></span></span></p> </td> </tr> </tbody> </table>

How does that measure up to the current generation of highway-capable all-electric vehicles?

<table> <tbody> <tr> <td><strong>Vehicle</strong></td> <td><strong>Battery</strong></td> <td><strong>Range</strong></td> <td><strong>Price</strong></td> </tr> <tr> <td><span>Nissan Leaf</span></td> <td><span>24-kWh</span></td> <td><span>73 miles (117 km)</span></td> <td><span>$27,700</span></td> </tr> <tr> <td><span>Chevrolet (GM) Volt</span></td> <td><span>16.5-hWh</span></td> <td> <p>Electric Mode: 38 miles (61 km)</p> <p>Hybrid Mode: 380 miles (610 km)</p> </td> <td><span>$31,645</span></td> </tr> </tbody> </table>

Both the Leaf and Volt sell for roughly half the price of the Model S. However, the Volt has a special feature - an onboard gas-powered generator that extends its range ten fold.

Demand for the Model S was high during the third quarter, with orders rising sequentially from 11,500 to 13,200. Tesla’s reservation website shows that its more expensive Model S Signature has already been sold out, strongly suggesting that fourth quarter reservations will come in much higher than anticipated.

Model S program director Jerome Guillen stated that orders would come in “significantly higher” than anticipated. However, final numbers won’t be known until its official fourth quarter earnings release in February.

Production vs. Demand

While the demand has been growing, analysts were concerned that Tesla wouldn’t be able to meet its production targets.

A recent report states that Tesla’s previous production rate has doubled to 200 Model S sedans weekly, topping 10,000 units annualized. By the end of fiscal 2012, Tesla plans to double that number again to 400 to achieve its stated goal of selling 20,000 Model S sedans in 2013.

If Tesla can sell 20,000 Model S sedans in 2013 - which looks increasingly likely due to the rising trajectory of reservations and its recent push into Europe - then it could achieve positive cash flow for the first time in its history. This also cuts the waiting period for the first Model S sedans to under six months.

The Model X and Beyond

Tesla is planning to use the base of its Model S sedans to create an all-electric SUV, known as the Model X. Production is slated to start next year, and tentatively priced 5% to 10% higher than its Model S. The production of a luxury SUV vehicle is aimed at a market which has a notorious reputation for poor fuel efficiency. 

If Tesla is able to successfully build on the Model S’ success, then the Model X has a chance of being a truly disruptive vehicle that could seriously hurt Mercedes-Benz, BMW or Toyota’s Lexus SUV sales.

Looking farther down the road, Tesla intends to release an even cheaper electric vehicle in the $30,000 price range. Sales and Ownership Experience VP George Blankenship made Tesla’s intentions to make its vision of the future a reality.

“We want to take away every hurdle there is to people driving electric cars,” he stated.

The Future

With that kind of determination to create a greener world, it’s hard not to admire Tesla Motors. The company has defied conventions, captured the imagination and loyalty of investors, and built a strong base of affluent customers. 

As for a national electric charging infrastructure, there may be hope on the horizon. Electric utility giant NRG Energy (NYSE: NRG), which operates in 16 states, has started to construct the country’s first privately-funded network of home and public charging stations through its subsidiary eVgoThe charging service operates on a subscription-based business model, where customers pay a flat monthly rate for unlimited access to its charging stations - which either run independently or partnered with a participating retailer. 

Granted, these are baby steps in a slow moving revolution, but any advances on this front will be a boon for Tesla.

Tesla isn’t a safe stock for conservative investors. It’s financials are fundamentally weak, and its future relies completely on meeting its production targets. But Tesla has a major advantage over General Motors and Toyota. It was built from the ground up to produce the cars of the future, and will not have to turn its entire business upside down to adapt to the upcoming change.

Leo Sun owns shares of General Motors. The Motley Fool recommends General Motors and Tesla Motors . The Motley Fool owns shares of Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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