Tesla's Down. Should You Buy?

In a quiet week, it was a big move: Shares of upstart automaker Tesla Motors (Nasdaq: TSLA  ) dropped more than 10% on Monday on news that the company's post-IPO "lockup" period had expired, allowing Tesla insiders to sell their shares for the first time.

Tesla's trading around $26 as I write this, a sizeable drop from the $30-$35 range it had been trading in since it popped in mid-November. Is that enough of a drop to make it a buy?

Those pesky fundamentals
Whether you love Tesla or hate it as an investment (and I have mostly leaned to the latter position so far), the company's challenges and opportunities aren't much of a secret. On the one hand, the company has a lot going for it:

  • A rock-star CEO. Elon Musk, a PayPal co-founder, is a Silicon Valley Big Deal, and he has plowed a big chunk of his own fortune into Tesla.
  • A track record. Tesla's Roadster may be a high-priced niche car that has sold in tiny numbers, but it's the real deal, an all-electric car with great range that's fun to drive and beloved by its owners. And it's a car that passed regulatory muster in markets all over the world -- a huge, expensive achievement and one that adds a lot to Tesla's credibility as an automaker.
  • Big-league partners. The barriers to entry in the global auto biz are immense -- but Tesla's partnerships with Mercedes-maker Daimler and giant Toyota (NYSE: TM  ) give it a legitimate foot in the door, and deals with big-league suppliers like Panasonic (NYSE: PC  ) add credibility.
  • An emerging business as a supplier. Tesla is already selling electric drivetrains to Daimler and working on an electric RAV4 with Toyota. While it lacks the glory of being a world-changing automaker, this is a good, profitable business.
  • Money in the bank. Between its IPO proceeds and a U.S. government loan, Tesla should have ample cash to get the Model S to market.

On the other hand, there's a lot to give one pause:

  • Hubris. Statements by Musk, among others, leading up to the company's IPO suggested that Tesla's management thought that outsmarting and out-teching the major automakers was going to be easy. But it turns out that the global auto business is brutally competitive -- and years of restructuring have left companies like Ford (NYSE: F  ) and General Motors (NYSE: GM  ) with lean, hungry, and talented engineering teams.
  • Timing. The supplier business is nice, but Tesla's real hopes ride on the Model S, a sedan due in 2012. Tesla's electric drivetrain has the best range in the business right now, but 2012 is still a long time away. Meanwhile, the major automakers and suppliers are spending billions on electric-car development, and the technology is advancing quickly. Will the Model S still have an edge when it hits the market? It might. But it's likely to be small and under constant threat.
  • Competitiveness. There's an issue beyond the technology: The Model S' pricing and features list aim it squarely at offerings from brands like BMW, Audi, and Lexus. That may be the toughest market segment in the whole world to crack -- just ask GM, which is only now getting close with Cadillac after decades of trying, or Honda (NYSE: HMC  ) , which has yet to get its Acura lineup into this territory. Standards of fit and finish here are incredibly high, and buyers are picky, picky, picky. Tesla's Roadster is a fine product, but it was largely designed -- and is largely built -- by outside suppliers. The Model S will be built by Tesla in California. Can this brand-new small-scale manufacturing operation really deliver a product that competes on quality and price with BMW or Mercedes -- or even with Nissan's upcoming all-electric Infiniti?

Long story short, while there's a lot to like about the idea of Tesla, there are some hard-headed reasons to believe that the company's road to a sustainable business may be a rocky one.

But what about the stock?
I have seen nothing to suggest that Tesla will have a decisive, game-changing technological advantage once the Model S comes to market. Without such an advantage, Tesla's best-case scenario is to be just another automaker -- one that lacks the global scale to compete. That sounds like an acquisition scenario to me, and those expecting to receive a dot-com multiple on that buyout are likely to be disappointed. The growth and margins just won't be there.

And meanwhile, the expiration of the lockup period means we're likely to see some ongoing selling pressure in coming weeks, as initial investors seek to diversify a bit and lock in gains after the first of the year. That's not necessarily a bad thing -- but it won't help the stock price in the near term. If you're intrigued by the idea of owning Tesla, even if just to ride the hype bubble for a little while, holding off a bit longer might be a good idea.

Have you added Tesla Motors to your watchlist? It's the easiest way to keep up with all our Foolish coverage of the Silicon Valley upstart.

Fool contributor John Rosevear owns shares of Ford and General Motors. General Motors is a Motley Fool Inside Value selection. Ford is a Motley Fool Stock Advisor pick. You can try any of our Foolish newsletter services free for 30 days, with no obligation.

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.


Read/Post Comments (4) | Recommend This Article (6)

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  • Report this Comment On December 30, 2010, at 8:00 PM, baldheadeddork wrote:

    My problems with Tesla center around four claims they're making for the Model S:

    1) It will go into production in "early" 2012, just 3 1/2 years after the announcement in a press release.

    2) It will weigh 3800 pounds.

    3) It will have a 300 mile range.

    4) It will cost half as much as the Roadster.

    Here are the problems:

    1) A 3.5 year development cycle for a clean-sheet car is running WFO for a company that has all of the engineering and design resources in place and has successfully created cars before. Tesla didn't have the first and isn't the second. They're going to learn how to design as they go, and learning = making mistakes that require doing the same thing more than once.

    The best realistic outcome is they only screw up little things which pushes the launch back a year. If they get the design of the chassis wrong and don't discover it until they fail crash testing, everything they've done to that point is a waste. Ditto if pothole testing jams the doors shut or bends the sheet metal.

    2) With modern safety and electronics, 3800 pounds is typical for a regular midsize sedan with a full tank of fuel. Electric power trains weight more than an internal combustion system. The only way the Model S stays under two tons is if they use a lot of aluminum, magnesium and composites in the chassis, which are much more expensive than steel and difficult to engineer correctly.

    3) A 300 mile range would be a 25% improvement on the Roadster, which weighs a thousand pounds less than the target weight of the Model S. Weight is the range killer in electrics. A car that weighs a third more is not going to get 25% better range.

    4) And the cr@p cherry on this BS sundae, it will cost half as much as the Roadster. It's a larger car, with more batteries and more materials going in. It's a fresh-sheet design with all the R&D that involves, but they're going to be able to sell it for half as much as a glorified kit car. (Someone please bring up Tesla's claim that it's not.)

    I know most of the readers on MF aren't car geeks, but it's important to understand this because the price of TSLA is based mostly on these claims coming true. Tesla would be a microcap if you were just valuing it as a supplier or third-party builder of EV's for other automakers. The remaining two billion and change in their cap is built on the expectation that they will become a real car company, and their claims are so wildly removed from the world as we know it that they remind me of how Pets.com and Webvan said they were going to change the world.

    But I think the worst part of this is how trivial investments by Toyota and Panasonic, and a microscopically small deal with Daimler, are being spun as endorsements on Tesla's future. If Tesla disappears tomorrow, the losses to Toyota, Panasonic and Daimler would not even register on any of their next quarterly reports. Their investment in Tesla is the same as you or I buying a lottery ticket. Sure it's a stupid bet, but it's only a buck.

    Unless TSLA makes up a similarly minute part of your portfolio, you shouldn't touch this company with a ten-foot pole.

  • Report this Comment On December 30, 2010, at 8:00 PM, baldheadeddork wrote:

    (And Happy Holidays, John. Hope Santa brought you some Blizzak's for the CTS - or a dash cam.)

  • Report this Comment On December 31, 2010, at 4:53 AM, h8tow8 wrote:

    baldheadeddork - there are few flaws w your reasoning...

    1. It's silicon valley company not Detroit company... things happen faster here... plus Toyota practically gave them NUMMI a $1B plant for a mere $42M. They have employed the best in the automotive business w decades of experience... I bet noone would have said Elon Musk would be selling rockets to NASA 3.5yrs ago.. but he does!

    2. The Roadster weight a mere 2,700lbs compared to a 911 Turbo that weighs 3,500lbs... So why would you say electric drive weigh more than ICE? Of course they will use aluminum, they have sources more than 80% of their parts from suppliers already.

    3. You make the assumption that they will use the exact same chemistry in their 18650 cells as they do w the Roadster... that's not the case, they are working with Panasonic on completely new more efficient chemistry on their new 18650 cells... so they will get 300mi with less cells in their new 90KWH battery and the cost lowers about 10%/yr

    4. The roadster is hand built... imagine what the 911 Porsche would cost if that was hand built at about 1000/yr... scale of economies.

    Just remember, Elon Musk is heading up this company... The same guy that created Paypal (x.com), Zip2, Space X (Falcon 9, Dragon) and Solar City... he's only 39, I wouldn't bet against him.

  • Report this Comment On December 31, 2010, at 9:43 AM, baldheadeddork wrote:

    @h8tow8:

    1. Are roads built faster in Silicon Valley? What about houses? Did the NUMMI plant in Fremont build cars twice as fast as other plants?

    Because software is developed quickly doesn't mean Silicon Valley entrepreneurs can do everything quickly, especially when it's in a brand new field.

    And the idea that everything happens faster in tech is a myth. Both Apple and Microsoft need more time to create a new desktop OS than the auto industry needs to get a new car into production. A new console game platform takes about as much time as a new car.

    About the NUMMI plant, it's just a building. Musk has said that all but a small part of it is going to be walled off.

    2. Comparing the Tesla Roadster to the 911 Turbo is a joke. The 911 is physically much bigger, has AWD, rear seats, and is better equipped.

    Let's compare the Tesla, to, say, a Lotus Elise. Which makes sense because the Tesla Roadster is an Elise that's been modified to run on batteries. The curb weight of the Elise in US spec with a full tank of gas is 2,000 pounds.

    Or here's another example: The Toyota RAV4EV weighed 900 pounds more than the gas version of the same vehicle.

    Electric drive weighs more because batteries are very heavy. The battery pack in the Roadster weighs 900 pounds. That's going to be roughly twice the weight of the entire engine and transmission system (inc. fuel system, cooling, exhaust) in the Elise.

    And you're missing the point about aluminum in the Model S. The problem isn't buying aluminum. The problem is designing aluminum chassis structures that can pass crash testing and have the stiffness that buyers expect. Audi spent years learning how to design aluminum monocoques for the A8 and still haven't found a way to make it affordable in the A6 range where the Model S aiming.

    3) Battery chemistry won't give a 3,800 pound car 25% more range than a car that weighs a thousand pounds less. You need a fundamental breakthrough in battery technology to get that kind of leap.

    4) Hand-building is much more economical for low-volume production. Making the leap to mass production in this business is extremely difficult because it requires a huge (nine-figure) capital investment and a couple of years of lead time before your first sellable car comes off the assembly line.

    (Another tell from Tesla is that they haven't started the assembly lines for the S yet. If they want to be building that car in early 2012 those lines need to be almost completed right now so pre-production testing can begin by mid-spring 2011.)

    Tesla's story would be a lot more believable if they said the Model S was going to be a hand-built, $175-200K competitor to the Maserati Quattroporte and the Bentley Flying Spur. (Which is what Fisker is doing.) But they're not. Instead they're spinning fairy tales to people who don't know the business.

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