Why to Wait on Tesla Motors
Lyons is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Jetpacks, smartphones, the Lion King in 3D—the future is coming fast, and it wants our money now. Breathless commentaries on soon-to-burst industries abound, and while not all of them make sense (do I really want Mufasa to pop out at me like that?), at least one comes off as an easy sell: electric cars. As the global economy falters, the Middle East simmers, and public tolerance of emission pollution wears thin, it seems increasingly feasible that the drivers of 2020 will not only park their cars, but also plug them in.
At least, that’s certainly what the people over at Tesla Motors think.
Co-founded in 2003 by PayPal whiz-kid Elon Musk, Tesla (NASDAQ: TSLA) is a Silicon-Valley car company focused exclusively on electric vehicles and electric powertrain components. Whereas other, more established companies are generally toeing the water with hybrids, Tesla sets itself apart by being all in on the electric front—natural fuels are, simply put, not on their radar. Their vehicle business, which accounted for over 75% of their revenues in 2010, has been historically tied up in the sale of their Tesla Roadster, a sporty two-door affair that, for a cool $100k, will give you 240 miles per charge and a leg up in the environmental-awareness arms race with your smug, compost-piling neighbors. With just over 1,800 units sold, the Roadster has definitely been more brand-builder than cash-cow. Tesla aims to change that with their forthcoming Model S, an understated sedan that will appeal, in both function and price, to a much broader consumer base.
Add in a pretty penny (around $21m in 2010) gained from electric powertrain sales to big-names like Daimler (ETR:DAI) and Toyota (NYSE: TM), and you’ve got a pretty good sense of where Tesla is right now. Namely: the vanguard of the electric car movement.
And I shouldn’t buy shares because…?
They might not be there for long. A stroll through the Tesla’s 10k offers plenty to be nervous about, and even though it’s fun to root for the underdog, the risks at play here are simply too great to ignore. For starters, let’s look at earnings, which, as it turns out, are … less than nonexistent. Tesla netted a loss of $154m EBIT in 2010, up a solid $99m from their 2009 foray into the red. While that’s no surprise, considering the equivalent jump in operating expenses to finance the independent sale and service of their expanding fleet, the same cannot be said of their 2010 capital expenditure. Weighing in at a whopping $105m, and dragging their FCF down to $-232m, Tesla’s ambitious decision to build a full-scale manufacturing factory for the Model S in Fremont, California has left them with a good deal of ground to cover before they (or their shareholders) begin seeing anything in the way of profit.
Of course, depending on how you read the tea leaves, all this can be seen as a good thing: a young, promising company with a history of innovation reaches deep into its coffers, sets the stage for the debut of a breakthrough product, and rewards early investors with a steady upward climb. Sounds sexy, doesn’t it? There’s only one problem: Tesla doesn’t really know how to make cars.
Up until this point, they have depended entirely on the services of Lotus Cars, a British manufacturer of sport and racing vehicles, to design, build, and deliver the chassis of each and every Roadster they’ve ever sold. In other words: they provide the muscle, but the bones come in the mail. Taken in this context, their factory in Fremont (slated to begin operations in 2012) signals two very important facts about Tesla:
1) They are ending the relationship that has provided them with the infrastructure of their flagship product, enabling them an even tighter in-house approach for their upcoming Model S.
2) They are staking their future on the success of the Model S, the Model S on the success of the Fremont plant, and the Fremont plant on their capacity to successfully manufacture automobiles from the ground up…something they have never done before.
Tersely put, I don’t buy it. Or rather: I won’t buy it right now. As things stand, Tesla is trying to move what is essentially a Silicon Valley, technophile brain-trust into the entrenched, rust-and-bolts world of building cars, and while there is a chance they succeed at doing so, I can’t help but think that they won’t. Apple, like so many other Silicon Valley success stories, sticks to their area of expertise and lets others take care of the assembly line. Tesla would be wise to do the same.
But what if the plant works?
Fast forward to December, 2012: the Fremont plant is running great, the Model S is a hit, and Tesla looks like it's finally making a run for the black. Do I bet my Christmas bonus on the farm? Not necessarily. As the company has made clear in their reports, success for Tesla could spell the end for Tesla. As they move into the Big Boy side of the sandbox, they will also step on the toes of some extremely resource-wealthy competitors; should Tesla show that what they want to do can be done, there is nothing (not even their 35 issued and 280 pending patents, most of which are too broad to afford any real protection) to stop the established auto industry from doing it better. Serious competition from the real players could mean a swift finale to this story. As for a buyout: if Daimler’s decision to end business with Tesla in 2012 in favor of a new electric venture is any indication, the old guard might be through making nice with the new kid.
What I’ve discussed thus far are only some of the roadblocks ahead for a young Tesla Motors. Toss into the mix a CEO with his hand in one too many cookie jars (solar energy and space travel, to name a few), a management team that is largely new to either the company or the industry, and an upcoming re-vamp of EPA standards that is likely to reduce advertised miles-per-charge numbers by at least 30%, and you’ve got a story that needs to fight like hell to earn itself a happily-ever-after. If it does? Then the people who got in now will become spectacularly wealthy, and the people who come in along the way will do just fine too. If it doesn’t? Then the electric car movement will shift in another direction, and investors, speculators, and hype will shift with it.
The last time I brought up Tesla in conversation, a friend told me that his father knew a guy in Philadelphia who was in equity—he said his dad’s friend thinks Tesla is “rock solid.” As he said “rock solid”, he gave me a thumbs up and a wink: that is how solid his dad’s friend considered Tesla to be. Now that might be the case in Philly, but from where I’m standing, hype doesn’t make you rich, and cars still come from Detroit. From where I’m standing, it’s a perfect time to wait and see.
Lyons George does not hold a position in any of the above-mentioned companies.