Tesla Motors' Big Surprise

This wasn't a surprise: Tesla Motors (Nasdaq: TSLA  ) lost a bunch of money in the second quarter -- despite a big increase in revenues.

The Silicon Valley electric-car start-up posted a loss of $0.53 a share on revenues of $58.2 million for the quarter. Both of those numbers exceeded consensus Wall Street estimates, but the trends weren't a surprise: Demand is strong (by Tesla standards, at least) for the company's current car, the Roadster, while development of the upcoming Model S sedan is burning big bucks.

The big surprise was elsewhere -- a hint of a huge new deal with mighty Toyota (NYSE: TM  ) .

Tesla's big surprise
Tesla has parts-and-technology deals in place with Mercedes maker Daimler and battery supplier Panasonic (NYSE: PC  ) , but its deals with Toyota are the ones that have attracted the most attention from investors. Thanks to the Japanese giant, Tesla has a factory, a contract to help develop the electric version of Toyota's RAV4 SUV, and a very visible patron in Toyota CEO Akio Toyoda, who famously test-drove a Roadster last year with Tesla co-founder and CEO Elon Musk.

That RAV4 contract delivered $19 million to Tesla's bottom line during the quarter, and it's expected to bring about $100 million after the deal was expanded in July. But on Wednesday, Musk hinted that much more may be on the way: During a call for analysts, Musk said the company was discussing a deal with Toyota that would be "an order of magnitude" larger than the July contract.

That means billion-with-a-B, the company confirmed after the call. It's not yet a done deal, and we can only guess at the details, but that kind of contract would transform Tesla from a long-shot start-up carmaker to a serious, credible industry supplier.

Maybe even a profitable one. That would be a nice surprise for shareholders.

A smarter route to profitability?
Musk has talked brashly of "disrupting" the global auto business, but I've long thought that the company's best path to sustainable profitability would be as a supplier, not a carmaker. The barriers to entry as an auto manufacturer are immense in today's low-margin, globalized car market, but Tesla's experience with electric power trains makes it a valuable potential partner for big automakers looking to up their electric game.

Technologically, Tesla's kind of a one-trick pony, but it's a good trick. The Roadster was the first, and is so far the only, all-electric car that meets global quality expectations with a range comparable to conventional gas-powered autos. To some extent that range advantage is due to the Roadster's expensive battery pack (and corresponding six-figure price point), but the Tesla systems that manage those batteries are good enough to have attracted Toyota's attention, and Toyota is no green-car slouch.

Intriguing possibilities going forward
Tesla was never likely to make it as "just" a carmaker. Plain and simple, the company isn't likely to ever have the scale or resources to compete profitably with the likes of Ford (NYSE: F  ) or General Motors (NYSE: GM  ) , much less the German luxury-car makers that dominate the segment Tesla's hoping to enter with the Model S. A niche producer of a few thousand expensive cars a year for the world's gadget geeks? Maybe. But that's not a route to the kind of profitability Tesla shareholders are expecting.

But now we can at least credibly imagine Tesla as the outsourced center of Toyota's electric-car expertise. Could that lead to profitable tie-ups with other automakers? Or maybe even a buyout offer? Tesla's market cap is still under $3 billion -- even an offer with a fat premium wouldn't strain any of the big automakers too badly.

These are just possibilities right now, of course. But they're worth close watching, because this company seems to have a way of getting more interesting every quarter.

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Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. 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.


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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 August 04, 2011, at 7:35 PM, rosenauj wrote:

    Listened to the call personally and I couldn't have written a better article. My feelings exactly. This market downturn is creating great buying opportunity and the price is now below where they made their secondary offering in Q2.

  • Report this Comment On August 05, 2011, at 9:14 AM, SMOKEN42 wrote:

    IT'S BEEN WELL KNOWN, THAT THIS COMPANY'S ONLY CHANCE TO SURVIVE IS TO BE "BOUGHT" BY A BIG AUTO COMPANY !!!!!!!!!!!!!!!! GOING UP AGAINST FORD, B.M.W., TOYOTA , MERCEDES IS JUST NOT REALISTIC !!!!!!!!!!!!!!!!

  • Report this Comment On August 05, 2011, at 11:24 AM, ramon123 wrote:

    Rosevear keeps pushing his silly notion that Tesla's only value is as a parts supplier. Then he brings out his Neanderthalish claim that breaking into the auto business is hard, then compounds his error by claiming that only big boys (like the recently bankrupt GM?) can survive in a business with high entry barriers. Rosevear apparently thinks that, well, a car is a car, be it electric or

    whatever. That is his fatal mistake - he does not understand the huge difference between EVs and ICEs. They don't share even half of their parts.

    The fact that GM spent twice as much developing their crappy (and very slow selling Chevy Volt) as Tesla is spending to produce their beautifully designed and engineered Model S should have clued in the clueless that talent counts for a whole lot more than sheer size, and that's true regardless of the type of business. Look at Apple.

    And apparently those barriers don't exist at the level of the Tesla roadster, which sold quite well and made a profit, something Rosevear NEVER mentions, in order not to spoil his pet theory about a business he seems forever incompetent to analyze. According to his view, BMW should be filing Chap 11 right now, instead of garnering profit margins that Rosevear's "big boys" can ony dream about. The Fool would be well adviced to send Rosevear off to some other place and stop him from embarrassing the Fool with his mindless

    theories.

  • Report this Comment On August 05, 2011, at 11:54 AM, David369 wrote:

    Good article!!

  • Report this Comment On August 05, 2011, at 12:45 PM, TMFMarlowe wrote:

    @ramon123: To date, over the several years of the model's life, Tesla has sold fewer than 2000 Roadsters -- a car largely designed and built by Lotus, by the way, not Tesla. For comparison, Ford sells almost 2000 Mustangs a week. The company has never, to my knowledge, come close to making a profit. If you can refute that with links to actual evidence, please do so.

    And yes, from a mass-consumer perspective, a car is a car -- or more to the point, any given car has pluses and minuses, no matter the powertrain. EVs aren't going to compete for consumer dollars in some magical wonderland where alternatives don't count, they're going to have to sell themselves on the merits next to Fords and Toyotas -- or in this case, given the price point to which Tesla aspires, BMWs and Infinitis.

    As to whether I can tell the difference between an internal combustion engine and an electric motor... let's just say that I've spent more time scrubbing automotive grease off my hands over the years than most folks.

    John Rosevear

  • Report this Comment On August 07, 2011, at 2:23 AM, baldheadeddork wrote:

    Ramon123 keeps insisting Tesla is profitable, we keep pointing out that they never have been. This is from April: http://www.fool.com/investing/general/2011/04/01/tesla-motor...

    (For those just tuning in, Tesla lost $240 million from 2003-2009 according to their IPO paperwork. They lost $154 million last year. They've lost $110m in the first two quarters of this year and they're projected to lose another $90m before the year is out. Next year the projected losses fall to a mere $160m. That's $754 million in losses from the inception of the company and if everything with the first year of the Model S goes perfectly - Tesla will have sold 7,400 cars for it. You do the math.)

    About GM's "very slow selling Chevy Volt" - it is a very low volume model for a company like GM. Through July only 2,900 Volts have been delivered this year. But that's 1,000 more Volts in 2011 than all the Roadsters ever produced by Tesla. The "very slow selling Volt" knocks out in about four months what has taken Tesla three years to do.

    ******

    But enough with the fanbois. I'm here because, as Santayana wisely observered, "it is a deep delight of the blood to knock a thing down, especially when it is cocked at an arrogant angle."

    That's what Toyota did on Friday with this story about Elton Musk's hinting at a billion-dollar deal with Toyota, though I doubt they felt any happy while they were doing it. Just one day after Musk floated that in Tesla's conference call and set off a flurry of speculation on what it could be, Toyota cleared the air. The RAV4EV would be built at a Toyota plant in Canada, not at the old NUMMI plant in Fremont, California, and "as previously announced", Tesla would only be supplying the electric powertrain components as laid out in their existing $100m contract. For the final application of wingtip to backside, Toyota stated that the Tesla-supplied components would be made at Tesla's facility in Palo Alto. Whatever is going to happen at the plant in Fremont isn't going to have anything to do with the RAV4EV.

    (Before Damon123 can say anything, supplier contracts are for the part and the plant where it is built. You can't move a line across town without approval from the customer and an amendment to your contract.)

    Unless Musk has the patent to make everyone forget Toyota's last three years, that bit of bragging has probably done a lot of damage to his relationship with Toyota. I used to work for a Toyota supplier and had direct dealings with Toyota Motors Engineering and Manufacturing (TEMA). The short version of the rulebook is, you don't say s**t without TEMA's approval. You are warned at the beginning of any negotiation that all discussions are confidential. After you get a deal any public announcements related to business with Toyota have to be approved by TEMA, and any questions about the products you make for Toyota must be referred to TEMA.

    This in itself isn't unique to Toyota. Every manufacturer expects you to take a subservient role and wants to control all of the public communication related to their company. A good manufacturer respects your expertise, a bad one walks in the door knowing more about your product than you do, but good or bad you work for them. It's never a partnership.

    I can guarantee it wasn't a coincidence that Toyota announced the production site of the RAV4EV the day after Musk motivated a bunch of reporters to call and ask if they were giving Tesla a billion dollars to build it in Fremont. The wording of the press release, emphasizing that the only deal with Tesla was the one they announced last month, was a direct crack to Musk's speculation and ego. And whatever is going to happen at Fremont, Toyota has made clear they aren't going to be part of it.

    A big problem with the argument of Tesla as supplier instead of manufacturer is that the company is insanely overpriced in that role. You can't value Tesla on earnings because they don't have any, but on price-to-sales they're valued at 30x the figure for a profitable, blue-ribbon supplier like Johnson Controls. If they were priced at a typical level for a supplier, TSLA would be a microcap stock. The valuation on this company is truly astronomical.

    But a bigger problem for Tesla-as-supplier is Elon Musk. Can anyone imagine him taking a back seat to the companies he builds parts for? On the right day this bozo is thisclose to having a messianic complex. It's insane to think he'll ever be a willing second banana to some dinosaur car company executive.

    Becoming a supplier isn't Tesla's way to survival. As long as Musk is in charge it's their surest path to ruin.

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