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Tesla's Road to Nowhere

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It's official: Tesla Motors has scheduled its long-awaited IPO for June 29. According to documents filed with the SEC on Tuesday, the California electric-car maker plans to sell 11.1 million shares between $14 and $16 a share on that date, raising up to $178 million.

It's a pivotal moment for the Silicon Valley carmaker, and for the emerging electric car industry as a whole. Tesla is easily the most recognized of the new generation of electric-car startups -- heck, they're arguably the most successful car-making start-up since Lamborghini, in 1963 -- but how much is that worth, really?

Put another way, do they really have a chance? And should you buy in?

A huge achievement, a daunting future
Let's get something straight right now: For all of the knocks on Tesla -- and there are quite a few -- they have done something enormously difficult: They have successfully developed and sold an electric car that meets all U.S. and EU government regulations, has the range and performance to be usable as a real car, is from all reports a blast to drive -- and has a devoted following of very satisfied customers. And they've built a widely recognized brand in the process.

Not impressed? Name the other companies that have managed all of that, starting from scratch. (I can't think of any.)

To get as far as Tesla has gotten is a huge achievement. But here's where the harsh reality enters: That achievement hasn't translated into a sustainable business. Since its founding in 2003, Tesla has managed to sell just over 1,000 of its $100,000-plus Roadsters. The company's total revenue -- again, since 2003 -- is a bit less than $150 million. It has lost about $290 million in total, including some $70 million of founder Elon Musk's personal fortune.

Profitable quarters to date? Zero. They lost $29.5 million in the first quarter of 2010, up from $16 million in the same period last year, on revenues that were flat at around $21 million.

That's not a promising track record. And here's the thing: The road ahead for Tesla is about to get a lot rougher.

Going where others no longer fear to tread
Tesla's plan, in a nutshell, is to go from being a niche maker of expensive sports cars to a maker of mass-market cars. The company's hope is to use the proceeds from the IPO, plus a $50 million investment from Toyota (NYSE: TM  ) and a $465 million long-term loan from the U.S. Department of Energy, to bring its next model -- and eventually, a range of models -- to market on a mass-produced scale.

Tesla's next model has already been announced: Called the Model S, it's a sleek-looking four-door sedan expected to sell for around $58,000. It'll be produced in the former NUMMI plant in northern California, which Tesla is acquiring (for most of that $50 million) from Toyota. Tesla expects to start delivering the Model S in 2012.

And that, right there, is the problem. (At least, the biggest problem.)

The Model S would be an intriguing proposition if it were the first really polished mass-market electric car to hit the U.S. market. But it won't be: The Nissan Leaf is due late in 2010, and Ford's (NYSE: F  ) all-electric Focus is expected to follow shortly after. These cars are smaller than the Model S, but they'll also be cheaper -- under $35,000. They'll also be built by huge global companies that have enormous R&D budgets, extensive relationships with heavyweight suppliers like Johnson Controls (NYSE: JCI  ) and Magna International (NYSE: MGA  ) , vast dealer networks, and decades of experience in meeting customer expectations in the world's most demanding automotive markets -- something Tesla can't yet claim, and may never be able to claim.

I'm having a hard time buying this
Selling a thousand high-end sports cars to well-heeled Silicon Valley hipsters is a completely different proposition from selling tens of thousands of sedans to mainstream consumers. Without some sort of breakthrough technology -- and Tesla doesn't really have any -- it's difficult to imagine that they'll be able to sell the Model S in quantity, especially as other offerings -- from established players and well-heeled newcomers like China's BYD Auto -- continue to hit the market in coming years.

"But they're backed by Toyota," I hear you saying. I think Toyota's $50 million investment is best understood as a way to "sell" the idled NUMMI plant while keeping an option on it -- and to win some PR points in the process. I don't see it as any sort of magic bullet for Tesla.

So should you buy this?
Long story short, I think the chances that Tesla will become a successful, profitable mass-market automaker are somewhere between slim and, well, less than slim. Tesla has never made money, has a huge debt load, is about to drop its only model to focus on a completely new car in a very different market segment, and in doing so will be going head to head with global giants in a demanding, low-margin, high-investment business.

Sure, they make cool cars. But is this company really something you want in your portfolio?

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Fool contributor John Rosevear owns shares of Ford. Ford is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 15, 2010, at 5:36 PM, HDTVBG wrote:

    Don't underestimate the power of LOVE. There is enormous goodwill being beamed at Tesla. The market wants this IPO real bad, it is the coolest company to go public in years. I believe Tesla will price near the top of its range, then go up 50-75% in the aftermarket in the first two or three trading days. This is a deal you'll want to get in on! I just got my New Issue Participation Announcement, and I am responding with an indication of interest right now . . .

  • Report this Comment On June 15, 2010, at 6:35 PM, CHUCK423 wrote:

    Cant think of any companies that established a brand name from scratch? How about SIRIUS/XM

    Loads of pizazz, huge debt, lots of dilution. Be prepared to go up huge and down huge.

    $58,000 electric car? $15 subscription to SIRIUS/XM?

  • Report this Comment On June 15, 2010, at 8:27 PM, TMFMarlowe wrote:

    @HDTVBG: This isn't 1998. I would love to see Tesla succeed, but I don't think it's likely -- and whatever bounce TSLA sees in its first few days of life seems likely to be short-lived.

    @CHUCK423: SIRI makes cars now? Seriously, I haven't followed the company much at all, but my new car has XM, and I can't say I'm impressed... if Pandora et al don't put them out of business within 3 years, I'll be shocked.

    Thanks for reading.

    John Rosevear

  • Report this Comment On June 16, 2010, at 3:24 PM, 7footmoose wrote:

    For every 99 losers there is one winner, TSLA could be that one. All it takes is the right idea at the right time with the right backing and a whole lotta luck. good luck, TSLA.

  • Report this Comment On June 16, 2010, at 3:31 PM, BobMichigan wrote:

    Yeah, how much money has Sirius/XM made? Good example.

    The all-electric model has one serious flaw, you can't go further than it's range without waiting for hours to charge.

    Why would the mass market buy this when they can get a Volt or plug in Prius that they will put no gas in 90% of the time, but if you want to drive it to Florida you CAN?

    Hey, love is great, knock yourself out buying the stock, and enjoy Oliver Stone's next big conspiracy movie "Who killed Tesla?"

  • Report this Comment On June 16, 2010, at 5:11 PM, baldheadeddork wrote:

    I think John actually understates the challenge of going from the roadster to the S. Every Tesla Roadster sold was built off the platform of a Lotus Elise, which means Tesla didn't have to pay the up front costs for chassis and platform development.

    That changes with the S. They'll have to invest over a hundred million just to develop a crappy luxury sedan. The price tag for a really good sedan, even one aimed towards the mass market like the Hyundai Genesis, is over a billion dollars. And unlike the Roadster, no one is going to describe high wind and road noise or a spartan finish as adding to the character in a luxury sedan.

    Range is also going to be an issue given the current technology. Tesla's smartest move was basing the Roadster model off one of the lightest cars in the world. Weight kills range in electric cars. Keeping a luxury sedan light enough to allow usable range - and selling it for sixty grand - is going to require some engineering alchemy, or a collapse in the price of making cars from carbon fiber and titanium.

    I'd also be skeptical about the valuation of the shares given Tesla's repeated trips to the VC window. Any potential investor should dig through the IPO statements about existing ownership shares and their disposition after the public offering. I haven't dug into it, but there's a lot of potential for Tesla to be another SIRI or DG.

  • Report this Comment On June 16, 2010, at 5:12 PM, baldheadeddork wrote:

    And one last thing, John: I don't think you can call Tesla the most successful new automaker since Lamborghini because Tesla hasn't made their own car from the ground up. The Roadster just puts them in the class of Carroll Shelby, a company that re-engines existing cars.

  • Report this Comment On June 17, 2010, at 7:20 AM, TMFMarlowe wrote:

    The Roadster leverages the Elise's basic design, but it's more than just a repowered Elise -- the dimensions are all different, and there aren't a lot of shared parts, though Lotus did essentially design it for them. Of course, we could also say that Lambo leveraged a lot of contract designers and suppliers in Modena to get going -- aside from the V12 (which was designed by someone Ferrucio contracted specifically to do the job, so technically a Lamborghini "employee", but built with parts that mostly came from outside suppliers) most of what Lambo did themselves was have Bob Wallace assemble prototypes and drive the doors off them so that they could find (some of) the weak points before production. Not all that different, really, except that things were a lot simpler for Lamborghini. But what Tesla is doing is a lot more than anything Shelby ever did.

    But yeah, I've said it over and over, but it's possible I should be saying it even louder -- attacking the mass market on one's own is a lot different from building a low-volume sports car with Lotus's help. "How hard can it be to build a decent car?", a Silicon Valley acquaintance of mine asked recently. Very hard, as I suspect TSLA is about to discover.


  • Report this Comment On June 28, 2010, at 1:19 PM, CVMp wrote:

    Nobody has mentioned the fact that most electricity comes from coal. So, the Tesla is effectively a coal powered car. Why is that a good idea in any way ?

  • Report this Comment On June 29, 2010, at 12:21 AM, HDTVBG wrote:

    Priced at $17 - a buck above the range. And TSLA increased the number of shares issued by 20%!

    I agree with the pundits that predict this will slip for months after the initial pop. I never said otherwise, just that it would be a very popular IPO and a profitable initial trading opportunity thanks to techno lust and love of things green. Long term this is also a winner, but it will take a very long time to make money.

    Here in California plugging into the grid for a recharge means you are running the car on a mix of exploitative and renewable energy sources including a mandated minimum of wind, Hydro etc., but mostly Nat Gas which is WAY cleaner than coal. The coal argument is a red herring anyway since even plugging into the grid in states still using lots of coal is more efficient and cleaner in the aggregate than gasoline. We Californians will no doubt be dreaming of solar panels on the roof of our homes spinning the needle backwards all day to offset the expense of charging our Tesla at night.

    Even if you love the smell of napalm in the morning it is time to throw off the chains of our Saudi overseers and become energy independent, TSLA is just one small piece of the equation.

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