Everybody Wants Tesla Except Me

With its impending IPO, the first for a domestic car company in 54 years, Tesla is feeling pretty bullish about its chances for success.  The company just announced it plans on adding 2.2 million shares to its public offering later this week, increasing its size by 20% and generating roughly $30 million in additional capital for the company.

Despite the demand that is clearly driving this IPO expansion, I remain cautious on the company's prospects. I love the technology, I really love the Lotus-like Roadster, and I hope Tesla becomes the U.S.'s fourth viable automaker after Ford (NYSE: F  ) , General Motors, and Chrysler.

However, I can't help but be reminded of the A123 Systems (Nasdaq: AONE  ) IPO last fall. Shares popped for the cleantech company, as investors saw a future where the company's batteries dominated the auto market. Unfortunately, the reality is that a manufacturer creating new technology in a competitive market faces some really tough sledding. Share prices for A123 Systems have slid; the company didn't become the instant success many had predicted.

Tesla is in a similar position. It has struggled to make a profit, with losses widening to $29.5 million during the most recent quarter. The company has turned to non-core activities, like selling carbon credits to Honda (NYSE: HMC  ) , to generate additional income. It sells a product for which there isn't widespread infrastructure support.

Tesla's success likely lays with its partnerships with industry giants Daimler and Toyota (NYSE: TM  ) . Both have a stake in the company and may well integrate Tesla technology into their own offerings. It's worth noting, however, that Daimler has also teamed up with Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) -supported BYD to jointly develop an electric vehicle. At some point, Tesla may become attractive, or its technology critical enough, to be gobbled up, but as a stand-alone enterprise I see a long struggle in front of Tesla to reach consistent profitability.

I think that rather than becoming purely a GM rival, Tesla will look more akin to Magna International (NYSE: MGA  ) . The Canadian parts company has teamed up with Ford (among others) to build electric cars on Dearborn-provided frames; but it also has ambitions about putting out its own vehicle, as its (failed) bid for Opel shows.

If Tesla becomes primarily a technology supplier to larger companies and offers a handful of vehicles, is that much different from Magna's potential future? Is that worth all the hoopla surrounding the IPO? Is it worth paying a premium for once shares flood the market? I don't think so, but I would love to hear the Foolish community's take in the comments below.

Berkshire Hathaway and Ford Motor are Motley Fool Stock Advisor recommendations. What's Stock Advisor? Only our flagship newsletter product, where company founders David and Tom Gardner face off and each pick an investment opportunity every month. Did I mention that both of them are soundly beating the market, trouncing the S&P by 60 percentage points? Try it or any of our Foolish newsletters today, free for 30 days.

David Williamson and the Fool own shares of Berkshire Hathaway, which is also a Motley Fool Inside Value choice. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (27)

Comments from our Foolish Readers

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  • Report this Comment On June 28, 2010, at 4:57 PM, mtracy9 wrote:

    "IPOs of brand-new enterprises are very risky because there's so little to go on. Although I've bought some that have done well over time ... I'd say three out of four have been long-term disappointments. What I try to remind myself (and obviously I'm not always successful) is that if the prospects are so phenomenal, then this will be a fine investment next year and the year after that. Why not put off buying the stock until later, when the company has established a record?" --Peter Lynch

    http://shouldersofgiantsinvestor.com/

  • Report this Comment On June 28, 2010, at 6:10 PM, investintexas wrote:

    I personally believe by Christmas this stock should have been priced around the 7-12 range, as this is where it is headed with an uncertain forecast. I believe their pricepoint is currently still to high to be a viable alternative for today's families, now put out a $22-28k version coupled with great looks & we have a winner, but $50k for it's initial S model spells trouble in my book. Is anyone else considering riding the surge in the morning & getting off with your profits?

  • Report this Comment On June 29, 2010, at 2:02 AM, matav wrote:

    As the owner of a Roadster, I can tell you these guys hit a home run their first time up to bat. They have created and delivered something that no other company has been able to (so far). I've had my car over a year. It fully delivers on everything Tesla promised and then some. It has no squeaks, rattles, or buzzes. It is an absolute thrill to drive. The after sale service and support have been outstanding. Having said all that, Tesla was never going to live (or not) on the sales of the Roadster alone. The future is the Model S and what follows from that. I "invested" in Tesla when I purchased my Roadster. I'm happy I did, and pleased to invest again at $17/share. For me this is not a short term quick hit. I'm in for the long term, which for me, means at least until sometime well after they start shipping the Model S. Challenges aplenty lie ahead, but Tesla's future should be bright. Nissan will sell a lot of Leafs; Chevy a lot of Volts; etc. but the market for alternative fuel vehicles will be large enough for most to be successful; including Tesla. It's said that the proof is in the pudding; let me tell you, their pudding tastes pretty darn good.

  • Report this Comment On June 29, 2010, at 11:46 AM, Milligram46 wrote:

    Tesla's pre-IPO balance sheet was frightening at best. The Toyota "deal" is largely a non-deal. We give you $50 million, you give us $42 million back and you get NUMMI, which we don't want anyway and is an outdated facility. We might build a car jointly with you, but after your third generaiton product launches.

    Tesla has implied that the S model will have a base price of $58,000, and that only gets you 160 miles range. Pile on the options and the price is going to skyrocket to north of $80,000.

    Meanwhile, those crazy Germans at Porsche have built a hybrid Cayenne SUV that will go 40 miles on pure electric at speeds up to 97 MPH, that will then run on gas, and for a lot less than $80,000. If you haven't sat in a Cayenne luxury car to luxury car, the bar at Tesla is set very high.

    You have plug-in models coming from Nissan, Toyota, General Motors, Ford, Hyundai, BMW, smart, and possibly Mini all before the Tesla S sees the light of day. Every single one of these models will be less, far less than an S.

    Only one quarter when they turned a profit, no viable product actually in development, over priced by the larger competition, questionable business model. This looks more like a dot gone IPO then a manufacturing enterprise.

  • Report this Comment On June 29, 2010, at 11:51 AM, fennecfoxen wrote:

    Remember that article a little while back on "headline risk", and how having a bunch of people scared about the future of (say) BP because it's all over the headlines actually might reduce investment risk, just because "omg headlines" are priced into the stock even more than the real risks?

    This seems to me like the exact opposite.

  • Report this Comment On June 29, 2010, at 11:54 AM, Milligram46 wrote:

    @matav:

    I appreciate your zeal for the Tesla Roadster. But lets be brutally honest here, they didn't really develop much. They got a Lotus Elise chassis from Lotus, they threw out the Toyota 1.8L 4-cylinder and replaced it with 6300 odd laptop battery cells in a gang connection. The net result is blistering acceleration, and a car that handles extremely well. But with a 600 plus pound weight disadvantage over the Lotus Elise, it doesn't handle that well. Think of it as putting a 60 pound backpack on a ballerina and making her dance the Nutcracker. Oh she can do it, and it will still look pretty for the most part, but it isn't the same.

    The other major issue with the Roadster is it simply isn't a practical car for 98% of the world. It has almost no cargo carrying capability, if you're over 6 feet tall you have challenges and the Lotus mantra of no-frills pure business cabin comes through. Oh sure, that appeals to 2% of the buying public but Toyota sells a lot of god awful squishy Corollas and Camrys, GM sells a lot of god awful squish Impalas, and Ford a lot of god awful squishy Taurus because Americans like cup holders, crushed velour heated seats, twenty-three speakers, and air conditioned seats. Right or wrong.

    But here is the final problem I see with the Roadster. I can buy one Roaster, or I could buy a Lotus Elise, a loaded Audi A6 for hauling the family around and still have a mountain of cash left over for years of super unleaded. Toe-to-toe on a road course, my Lotus Elise is going to eat the Roadster alive as long as I don't make mistakes in the turns. I just don't see the value prop beyond the emotional factor of, "I drive a bad ass electric car."

  • Report this Comment On June 29, 2010, at 1:29 PM, TMFBreakerRob wrote:

    I'll be a wet blanket here:

    I'll be very surprised in Tesla is around ten years from now. Yeah, they're early out of the gate, but I think the economics will kill them as the major companies increasingly electrify. Scale is everything in the long run...and they will not have the ability to keep going.

    I wouldn't touch this IPO even as a speculation. I'd rather give the money away to a worthy charity than see the company bleed my money away in an ultimately futile exercise.

    Next time, I'll try to not hold back.....LOL

  • Report this Comment On June 29, 2010, at 2:40 PM, MizzouFanVan wrote:

    TMFBreakerRob, do you have a better suggestion for an up-and-coming company, with huge growth potential? Tesla seems a bit like speculation, albeit sexy speculation. I'm looking for a long-term, maybe 10-15 year investment.

  • Report this Comment On June 29, 2010, at 3:25 PM, ragedmaximus wrote:

    wow what a pop and that's it it will poop out after today and leave alot of bag holders by next month. I like to get ipo's but you can only get so much and some trade sites impose a 30 day sell rule which is another story in itself but look at cie cobalt energy ipo debut high of 16 now at 7 bucks so as for tesla it will be there soon as limited income potential and a sky high ipo and my guess all time high price today only they are destened to fail all share holders and the public but i will say this much the 50k s car is sexy and if iwere rich id buy one but most rich people like bmw or porsche and will be near impossible to pry those coveted brands from their fingers. the only market for tesla is those tree hugger green peace freaks and like trees in the tropical rain forest there aren't enough of them to go around. so tesla stock will be 2 and change soon enough

  • Report this Comment On June 29, 2010, at 8:40 PM, TMFBreakerRob wrote:

    MizzouFanVan, I guess it depends a lot on other details of what you're looking for. It seems like you might be looking for a *small* company with a lot of potential, as opposed to a *large* company with same.

    My preference is for fast growing, financially solid, very profitable companies that are "undervalued" or "reasonably priced" (both qualifiers are subject to individual interpretation...LOL). Tesla doesn't qualify on any count, IMO, because there isn't enough history to even establish the reliability of their growth.

    This will seem like the ultimate cop-out, but I would suggest signing up for a free 30 day trial of Rule Breakers. There are a number of excellent choices there...many are "smallish"...from medical devices to energy management to software. I own a number of them (visible in my profile) but there are some excellent ones I don't own yet.

    You might follow up with a free 30 day trial over at Stock Advisor (cheaper if you decide to stay). They tend to have larger companies with lots of potential.

    Good luck!

  • Report this Comment On August 09, 2010, at 11:13 PM, AirForceFool wrote:

    I'd like some LEAPS please so I can short these guys... I wish them well of course, but I'm not going to bet that they'll make a lot of money for their investors...at least with risky ATPG, they have a product that people can afford. :P

    Chris

  • Report this Comment On August 09, 2010, at 11:19 PM, AirForceFool wrote:

    Sweet that was easy... now let's see what the volatility is to determine if there's an angle... :P

    Chris

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