Is Tesla Sitting on an Electric Chair?

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Tesla (Nasdaq: TSLA  ) makes cars that look and drive like sports cars. But is it really a sports-car manufacturer, or is it a wishing well down which you pour hundreds of millions of dollars and wish for a viable company to appear?

Betting the house on a battery-powered sports car with electrifying performance and a shocking price tag takes quite a leap of faith. At $109,000 each, the Tesla Roadster is not a car for the masses, even if it could seat more than two people. Yet the company has raised $554 million in equity since its 2003 founding, and it just announced that it will add another $196 million from proposed share offerings and private sales of stock. On top of that, Tesla has received a $465 million low-interest loan from the U.S. Department of Energy. That totals about $1.2 billion, and that's a lot of faith.

The ability to raise that kind of money certainly stems from the increase in oil prices that's finally bringing home to Americans that the time is now to seriously consider alternative forms of transportation. So Tesla plans to use its financing to broaden the appeal of its high-powered all-electric vehicles to more than just cash-happy celebrities and performance-car enthusiasts. It will expand its lineup with the $50,000 (after tax incentives) Model S luxury sedan and the SUV-like Model X. So far, Tesla has sold only 1,650 of its sports cars and has 4,300 reservations for the upcoming Model S. The Model X won't start selling until late 2013.

Blueprint for bankruptcy
But the company has lost $574.8 million since its inception, and development and manufacturing needs for the new models would rapidly increase its expenditures. Coming up with an electric-powered niche-market sports car based on an already existing vehicle -- the Lotus Elise -- is one thing. Designing a brand-new vehicle from a clean sheet of paper to compete with the likes of Mercedes, BMW, Audi, Lexus, Infiniti, and Acura, as well as changing the world's driving paradigm, is, I think, an improbable dream.

Compounding the odds against the Model S's mid-2012 introduction is that as of the end of this past March, the company did not yet have a final design for the car -- nor even an outfitted manufacturing facility. This will certainly not help Tesla reach its stated profitability goal of selling 20,000 cars a year, at least in the near term.

To put this in perspective, the only other all-electric vehicle available in the United States, the Nissan Leaf, has sold only about 1,000 units domestically this year. And that's with the backing of one of the world's major automobile manufacturers. It doesn't appear that consumers trust the Leaf's purported 60-to-130-ish mile range. There’s something about the "-ish" factor that doesn't inspire confidence in a battery powered vehicle.

On the other hand, notice that I haven't yet mentioned the Chevy Volt from GM (NYSE: GM  ) . The Volt is not an all-electric vehicle. But it's also not quite a hybrid vehicle like the Toyota (NYSE: TM  ) Prius or the Honda (NYSE: HMC  ) Insight. It is an evolved hybrid. It can be plugged in like an electric, but its onboard gasoline-powered generator can extend its 40-mile battery-only range to about 400 miles. Yet even with that advantage, the Volt has sold only 1,700 units this year.

Step away from the vehicle
J. Pierpont Morgan would have put it this way: Tesla's shares, like its cars, are for those who believe that if you need to ask the price of something, you can't afford it. But Foolish people must know the value of things, and Foolish people really should step away from Tesla.

Find out more about what The Motley Fool's analysts call "The Only Energy Stock You'll Ever Need."

Editor's Note: The technology publication Fast Company reported today (Friday) that Tesla Motors plans to discontinue its Roadster sales in two months.

Fool contributor Dan Radovsky has no position in any of the companies mentioned, but he would like to know why anyone would want to drive a sports car that didn't vroom like a sports car.

Motley Fool newsletter services have recommended buying shares of General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (11) | Recommend This Article (3)

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 23, 2011, at 10:47 PM, caltex1nomad wrote:

    Tesla announced today it will stop making the Roadster.

  • Report this Comment On June 24, 2011, at 6:34 AM, Barbereche wrote:

    Great article, but you forgot to mention that the $2.7 billion market cap includes $375 million in net worth and about $2.3 billion of blue sky.

  • Report this Comment On June 24, 2011, at 12:11 PM, 4r4nd0mninj4 wrote:

    "But the company has lost $574.8 million since its inception"

    Somehow you forgot to mention that Tesla bought and are retooling the NUMMI plant in a joint venture with Toyota...

    Tesla is also supplying battery packs to Daimler for their line of A-Class E-Cell cars.

    Does anyone remember the first cell phones and laptops? They were big, heavy, ugly blocks with poor battery life. But those who could afford them still bought them and over time the tech improved, the prices fell, and now everyone has one!

  • Report this Comment On June 24, 2011, at 12:56 PM, Smorgasbord1 wrote:

    Tesla is not betting the house on a $109K sports car, as the article claims. Tesla's plan was to start with high-end, low production vehicles to prove the technology to the world, then move to more and more accessible vehicles at higher and higher production rates. The next step in the Model S luxury sedan, and after that a ~$30K crossover/SUV. Tesla is betting the house on the Model S, not the Roadster.

    There are currently about 6,000 reservations for the Model S, for which people have put down $5000 or $40,000 a pop. As more and more people see the running prototypes in person I believe the reservation count will go up. Established maker BMW sells about 40,000 5-series cars in the US each year. It looks like Tesla is on track to sell 10,000 Model S cars in its first year, which is outstanding for a new car in this class of vehicle.

    People have been dismissing Tesla as an "improbable dream" for years now. They said the Roadster wouldn't work, that EVs were slow and didn't have enough range. Tesla proved them wrong: the Roadster has the longest range (245 EPA miles) by far of any production EV on the market today, breathtaking acceleration (0-60 under 4 seconds), and with some vehicles now surpassing 60,000 miles, reliability hasn't been a concern. Despite GM having previously produced and then abandoned its own EV more than a decade ago, it took a drive in a Tesla Roadster to convince GM chairman Bob Lutz that his company should take another look at EVs.

    The article says Tesla will fail because Nissan's Leaf isn't selling well. That's simply a non-sequitur. There's no correlation: the Model S will have significantly larger range, better performance, more cargo space, and be better appointed. Yes it costs more, but that's part of Tesla's smart business plan.

    Investing in this company today requires, as TMF's RuleBreakers often say, that you "think like a Venture Capitalist." Current profits or losses are not what drives this potential investment. Tesla has proved their technology works in the real world (so much so that Toyota and Daimler have licensed it for their upcoming EVds), now it can start putting that technology into more and more accessible vehicles. That's the story you're investing in (or not).

    Is investing is Tesla risky? Sure. But Tesla's track record of proving the doubters wrong is pretty darn good so far.

  • Report this Comment On June 24, 2011, at 4:39 PM, esgarcea wrote:

    Agreed smorgasboard1.

    Tesla has almost all of it's 1st year product plan of 5000 units reserved. 4300 units at $5000 deposit each is 21.5 mil. The additional $45,000 they will get (for the base unit) for each of those 4300 units will bring in 193.5 mil in revenue in 2012.

    Providing demand remains (yes, I'm being optomistic - and why not? This car is SEXY! Definitely NOT like a Nissan Leaf - Blech!!! No wonder it isn't selling) and they are able to bump production to 20,000 units the following year... at $50,000 each, that's 1 Billion in revenue in 2013.

    Follow that wil the model X, and the "everyday" 30k car, and Tesla looks to be doing exactly what they have been saying. They have been very clear in this plan and that it will take a couple years to be profitable.

    Keep it up Tesla!!!!! I can't wait for the Model X reveal later this year!!! I'm saving my pennies!!!

  • Report this Comment On June 25, 2011, at 9:58 AM, baldheadeddork wrote:

    @4r4nd0mninj4 - Selling batteries to a company that makes a couple thousand models a year (if that) doesn't justify a $2.6b market cap.

    @Smorgasbord1 - Nice use of strawman arguments. I pay pretty close attention and I don't remember more than a few people predicting the Roadster wouldn't work. Putting an electrical powertrain in someone else's chassis isn't rocket science, and Tesla had the money to start with a great platform. It's not that different or more complicated than what Carroll Shelby did fifty years ago turning the AC Ace into the Shelby Cobra.

    If Tesla can really deliver 160 miles of range from the base S remains to be seen. Physics says they'll have a hell of a time getting there. Weight is inversely proportional to range on electric cars and the features expected in a "premium" seven-passenger sedan means the S will weigh significantly more than the Roadster or Leaf.

    "Thinking like a venture capitalist" doesn't mean throwing money at any new idea that comes along. One of the keys of being a successful VC is getting a valuation on your investment that makes the risk worthwhile. You're not going to get that with Tesla shares. They want you to pay today for a massive level of growth that may happen years from now.

    Also, too, successful VC's tend to get in before the company begins hyping itself to everyone with a microphone or a notepad. If the typical man-on-the-street has heard about a company or its product, then it's probably too late for you to get in early.

    Which leads to....

    @esgarcea - I tore up the problems with Tesla's production plans a couple of months ago.

    "About the profitability of the Model S, I know this business pretty well. I don't care if you have unicorns and fairies working on the assembly line and Jesus H. Jobs himself running the show. You're not going to be profitable selling 10,000 cars at $57K retail.

    You either need to sell at a much higher price to be profitable at that volume, or you need to sell a lot more cars to be profitable with a $57K retail. To put Tesla's volume and retail price plans in perspective, $57K is well below the average selling price for Jaguar. In a bad year Jag sells 50,000 cars worldwide, five times Tesla's target. But it's been decades since they were profitable enough to survive as an independent company. Tesla supposed to be profitable at 1/5th the volume and a lower average vehicle cost, even though their powertrain costs are significantly higher than a conventional car? Forget it. "

  • Report this Comment On June 25, 2011, at 12:20 PM, Billiardman wrote:

    The thing that will hurt Tesla in the short term is the "Battery". Right now to acheive 300 mile range, you get a $20,000 upchage in cost of the car. Plus, if you're in a cold climate with the heater on, I doubt 300 miles is realistic.

    Ironicly, it's the "Battery" that will ultimately save Tesla. As battery technology improves, costs will come down. Those saving will go straight to the bottom line. Or they can lower the price and increase sales. Either way it's a win win.

    If the Model S was available today, I would write a check to buy one. When it becomes availble in 2012, I will get in line. But I won't lay out $5,000 in advance to buy a car. I think the Model S is a terrific car, but I'm not crazy. LOL

  • Report this Comment On June 25, 2011, at 2:47 PM, cokenfries wrote:

    A bit of snooping on the Internet will reveal hundreds of articles that have been written over the years predicting that Tesla wouldn't be able to do pretty much ever single thing they have done, from delivering the first Roadster to attracting the right talent or acquiring a manufacturing facility. Every single article lists the same tired reasons based on incorrect or incomplete information. Here's another one that can be tossed in the pile.

  • Report this Comment On June 25, 2011, at 5:46 PM, Smorgasbord1 wrote:

    @baldheadeddork - Tesla didn't put an electrical powertrain into someone else's chassis. They designed, engineered, and built the first production all electrical powertrain that delivers high efficiency, breathtaking performance, good range, and excellent reliability. Was that rocket science? Elon Musk would know, since his other venture is SpaceX. ;^) As for the chassis, while Lotus did the manufacturing, so much was redesigned by Tesla that there are actually very parts shared. it was very smart to start with an existing chassis to reduce development costs and time on Tesla's part, eh?

    My comment about "thinking like a VC" is just that - thinking. I wasn't suggesting anyone reading this should "be" a VC. What's interesting is that savvy businesses like Daimler and Toyota have been late stage investors in Tesla. Now, why would Toyota, having had their own all-battery EV Rav-4 some years ago, not to mention the battery and electric motor technology they use in the successful Prius, think they needed to invest in Tesla? Because they like Tesla's powertrain and battery technology better. Daimler did the same for its upcoming Smart EV cars. It's starting to look like Tesla's powertrain technology is better than rocket science!

    As for profitability, well, your strawmen there doesn't fly, either. Tesla didn't say their plans were for 10,000 Model S's a year. They said 20,000 the second year. How many the third year? I haven't heard. Also, $57K is the base price, as you know. Tesla has already said that the first 1000 Signature models will be fully loaded with the largest battery and all the options. People are expecting those to cost in the $90K - $100K range. So, at more than twice the volume and let's say 70% higher in final price (and that using probably higher profit options), suddenly the mid-term profit potential looks real. Add in the money Tesla will make selling OEM powertrains for RAV-4 and Smart EVs, and things are looking up for Tesla's future.

    And all this is without even getting into the potential of the Model X. I think Tesla's EV business plan is very smart. While other companies are trying to hit a mass market home run on their first time to the EV plate, Tesla is starting off by hitting singles and doubles, and taking a walk when offered. Everyone knows you don't put your homerun hitter up first in the batting order.

    That kind of business savvy is worthy of further investigation, not the outright dismissal you, and those you don't remember, offer.

  • Report this Comment On June 25, 2011, at 9:36 PM, baldheadeddork wrote:

    @Billiardman "Ironicly, it's the "Battery" that will ultimately save Tesla. As battery technology improves, costs will come down. Those saving will go straight to the bottom line. Or they can lower the price and increase sales. Either way it's a win win."

    I think that's a bad read for a couple of reasons.

    For starters, it's not a given that battery capacity will increase significantly without a proportional rise in cost. There's a bad habit of projecting Moore's Law onto parts of technology where it doesn't apply. Batteries is one of those areas. The move from lead acid to NiMH to Li-ion have made batteries smaller and lighter for the same output, but the cost per watt/hour has increased.

    Tesla is claiming it will reduce the cost of Li-ion to 20 cents per watt-hour "sometime in the near future", and if they can it will be a huge achievement. (Nissan claims 47 cents per for the Leaf battery.) But even if Tesla pulls it off, it means that their Li-ion pack will still cost 20% more than a lead-acid pack that makes the same amount of power.

    There's also a perception that no one was really paying attention to battery technology before Tesla and the other electric cars came along, and now that they are we'll see a quick string of breakthroughs. Nothing could be further from the truth. Battery size, weight and life have been the chokepoint on portable electronics for about 20 years. There is a long list of things software and hardware engineers would love to do on phones, laptops and tablets but they're limited by battery output.

    Electric cars are also on the wrong end of the cost/benefit curve for battery advancements. It's relatively painless to incorporate new battery technology in mobile devices because the battery make up a small part of the overall cost. An iPhone battery costs Apple less than $5, for example. Apple sells that phone for over $600. But for electric cars, the battery often costs more than the entire rest of the vehicle. The 300-mile pack for the Model S is estimated to cost $46,000.

    Now, if someone comes up with a way to get 50% more power than a Li-ion battery for 50% greater cost, adding that improvement would only add $2.50 to the cost of building an iPhone. Steve Jobs would give you the turtleneck off his back for that. But using the same breakthrough to get a 450 mile range in the Model S - or getting 300 miles from a pack the size and weight of the 200 mile Li-ion pack - adds $23,000 to the cost.

  • Report this Comment On June 27, 2011, at 1:09 PM, Glycomix wrote:

    Cars are becoming more expensive while individual incomes appear to be sliding, excepting of high tech.

    In the 1950s, the upper middle class families could afford only one in the US; everyone else walked or used public transportation.

    If the future requires electric or CNG cars, we're headed for the one-car to no-car family.

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