Is Tesla Turning Toward Success?

Might they actually make a go of it? Silicon Valley automaker Tesla Motors (Nasdaq: TSLA  ) reported third-quarter earnings yesterday, and its report came with some nice surprises. Those surprises started with the top-line number: While the company lost $65.1 million, or a big jump from the $34.9 million lost in the year-ago quarter, its $0.55-per-share loss (excluding some items) handily beat consensus predictions of a loss in the $0.60 range.

That loss wasn't a surprise: As I noted after last quarter's loss, Tesla's burning a ton of money as it ramps up to start production of its long-awaited Model S sedan. That's how it goes in the car business. The surprise is that Tesla's already got a lot of orders in hand -- and some new evidence that its electric-car technology is worth taking seriously.

Want a Model S? Prepare to wait.
The moment when the first saleable Model S rolls down Tesla's assembly line is still several months away, but that car -- and the next 6,500 or so that will follow it -- is already sold, or at least spoken for. Tesla CEO Elon Musk told Bloomberg last week that the company had orders for more than 6,500 copies of the Model S -- more than the company's anticipated first-year production.

That's an impressive feat for a vehicle from a start-up automaker, particularly considering that no copies of the production Model S currently exist for test drives. Moreover, that's mostly new business: Musk said that only about 600 of those orders are from buyers of the company's first car, the expensive Roadster.

All that said, it's still premature to count those sales as a done deal for Tesla. While Model S orders do require a $5,000 "reservation payment," which is high enough to be taken seriously, those payments are fully refundable, according to Tesla's website. If the first cars sold end up having trouble, or don't live up to Tesla's promises in some important way, those orders could evaporate in a hurry.

Long story short: We'll have to wait until the Model S is at dealers before declaring its launch a success. But Tesla had some other surprises with its earnings announcement, suggesting success on a different front.

Some big names are taking Tesla seriously
One of Tesla's first big-name investors was Mercedes-maker Daimler (OTC: DDAIF), which bought -- among other things -- the first right of refusal to buy Tesla outright should another automaker try to acquire it.

That was a strong early sign that Tesla's electric-vehicle technology was worth taking seriously, and it was followed by sizable investments from Panasonic (NYSE: PC  ) , which will make the batteries for the Model S, and a big commitment from Toyota (NYSE: TM  ) , which sold Tesla a factory and promised to collaborate on an upcoming electric version of the popular RAV4 SUV.

Yesterday, Musk announced a different sort of investment from Daimler: A letter of intent to supply a "full powertrain" for an upcoming Mercedes-Benz model. Think about that from a public-perception standpoint: If Tesla's technology is good enough to get put in a Mercedes, consumers will likely be thinking, "It's probably pretty good."

But is it? Or is it just that Daimler's electric-vehicle efforts are lagging behind global giants like Toyota and General Motors (NYSE: GM  ) , and the company feels an urgent need to play catch-up?

I'm not sure it matters. This is a coup for Tesla.

Tesla still has one big advantage
I've said for a while that I think Tesla's most likely route to long-term profitability is as a supplier of electric powertrains and technology to global automakers. Making money in the auto business -- especially the luxury-ish end of it that Tesla has targeted with the Model S -- is a challenge even for global giants with huge R&D resources and vast economies of scale. I've been skeptical that Tesla is ever going to be able to do that in an enduring way, and I remain skeptical -- 6,500 Model S orders notwithstanding.

But Tesla has shown one big technological advantage, and clearly it's enough to capture the attention (and dollars) of the likes of Daimler and Toyota. Unlike the mass-market electric vehicles from Nissan (OTC: NSANY), Ford (NYSE: F  ) , and the other global producers, which are (so far, at least) short-range propositions, Tesla's Roadster has the 200-plus-mile range needed to be used as, well, a real car. You can go away for the weekend in it, not just commute a few miles each way.

That's huge -- a big step toward the idea that an electric vehicle can really replace your gas-powered beast. It's also, at least right now, part of the reason why the Roadster has a six-figure price tag. Range costs money. What's possible on a low-volume six-figure sports car is harder to do on a $30,000-ish car like a Nissan Leaf or the upcoming Ford Focus Electric -- at least right now.

The future: Some clouds, some promise
It's likely that Tesla's ace-in-the-hole range advantage will go away in time. There's just too much being invested in moving the technology forward by companies whose resources dwarf Tesla's. But meanwhile, Tesla and its rock-star CEO seem to have stepped away from the juvenile trash talk they were dishing out before their IPO and set about the business of developing more products worth taking seriously. Musk now predicts that Tesla will be profitable in 2013. While I'm still skeptical of Tesla's long-term prospects, if the company can successfully pull off the Model S launch, the future could start to look a lot brighter.

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Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford. 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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  • Report this Comment On November 03, 2011, at 7:03 PM, spectechinvest wrote:

    Two corrections to point out on this article:

    1. Tesla's model S vehicles will not be going to "dealerships" they will be sold by Tesla in Tesla's showrooms and online.

    2. Toyota can't have much a head start on the EV market if Toyota is having Tesla provide the power train and batteries for its electric RAV 4. So mercedes might only be behind GM, and possibly Ford. But GM doesn't even make a fully electric car as of yet...

    Here are some interesting points from the earnings call i listened to yesterday and I have model S footage on the site as well: http://thespeculativetechinvestor.blogspot.com/2011/11/tesla...

  • Report this Comment On November 03, 2011, at 7:15 PM, rapnjoe wrote:

    I agree the Key to Tesla's success is as a supplier of electric powertrains and technology to global automakers, this is a win win for both the Auto Makers and Tesla as the Auto Industry could continue making the great cars they make with an option to have a Tesla powertrain.

  • Report this Comment On November 03, 2011, at 7:15 PM, spectechinvest wrote:

    Its worth mentioning that the "performance version" of the model S which according to Tesla will be available at launch will have modifications that can possibly make its range almost to 320 miles/charge.

    Also the Model X cross over due to be unveiled in Dec, is supposedly an ALL wheel drive vehicle with a new type of "air-suspension" which allows the vehicle to raise and lower itself depending if you are off-roading or freeway driving to Tahoe (which you will be able to reach on one charge from the bay area).

  • Report this Comment On November 04, 2011, at 9:37 AM, TMFMarlowe wrote:

    @spectestinvest: There's not much hair to split between "showroom" and "dealership", conceding that they're factory-owned shops (which I think I have mentioned in past articles). I'm always happy to accept corrections, but that one feels more like a complaint that I'm not using TSLA's preferred jargon. So be it.

    To the point about TM... EVs and hybrids are closely-related technologies, and TM and F and GM and HMC are all well-established hybrid players at this point. (And you might recall that GM had a rather famous EV once upon a long time ago.) TM's choice to throw TSLA some high-profile business is interesting, but I think taking that and concluding that TM's own EV R&D is bereft is pretty seriously naive. A more cynical view might conclude that TM's interest in Tesla is at least partly about being able to buy that factory back someday, though obviously Akio Toyoda's friendship with Musk is a big factor.

    That 320 mile range option will cost what? I don't remember exactly offhand, but my memory is that there won't be much change from a $100,000 bill, which is why I keep harping on the $-> range point. And the other relevant point is that a $100k luxury car is in S-Class and XJ territory... it will be interesting to see if they can really compete in that end of the market in terms of things like interior execution, which involves a lot more than a cool touchscreen and in-car wifi.

    I hear that you are a TSLA believer. I certainly don't have an axe to grind against the company, but from my perspective on the overall industry I can't help being a skeptic. The gist of my thinking on TSLA is that once you get the first few thousand cars out to the few thousand true believers, the next sales depend on being able to offer an overall value proposition that competes with the global giants. That is a more daunting challenge than most TSLA enthusiasts (who by and large seem rather un-wise about the ways of the auto business) understand, and I think it's a challenge that Musk himself didn't really understand until recently.

    I do think that their more recent push into supplying the global OEMs is an excellent move that will improve their chances of hitting sustainable profitability.

    Thanks for reading.

    John Rosevear

  • Report this Comment On November 04, 2011, at 9:43 PM, DenisVinnie wrote:

    The hair to split here is a curly one, the difference between they're " showrooms" and a" dealership" lies in the fact that Tesla is offering a technological and not mechanical means of transportation. Tesla vehicles, unlike Hybrids(worst of both worlds) are "Purebrids" with 1\10th the moving parts of either an ICE (age) vehicle or a Hybrid (mutt) vehicle. TM will not need the the support of a complex dealership with mechanics(grease monkeys) and extensive warranty programs to support vehicles that are prone to all sorts of mechanical problems. Tesla does own "Purebrid" EV technology, that is why two of the major automobile companies in the world have come to them for their expertise. The "jest" (my jargon) of your thinking is flawed, "once you get the first few thousand...... ", TM now has orders in place for over 7,500 Model S's(growing exponentially), and upon the introduction of the Model X, there will be a huge demand for them as well. With regards to being wise to the automotive industry, you have missed the mark. Thanks to Elon Musk, it is no longer business as usual, Silicon Valley, the Heartland of Innovation and Technology is now in the business of creating automobiles of the future. You can be rest assured that Elon understands that challenge, and for the most part, has already met, and will continue to deliver upon! If you think that the only cool thing about the Tesla S is a touch screen and the in-car wifi, I would encourage you to have a ride in one, you may be pleasantly surprised.....until then, I would suggest .....!

  • Report this Comment On November 05, 2011, at 2:58 PM, DenisVinnie wrote:

    Sorry but TM=Tesla Motors for me, I should make reference to it as TSLA

  • Report this Comment On November 05, 2011, at 3:40 PM, baldheadeddork wrote:

    The numbers for Tesla as an automaker have never worked and that hasn't changed. As a supplier, they are massively overvalued and there are huge questions about Elon Musk's ability to be the second banana in a relationship with Toyota, Daimler or anyone else.

    It's sad that people with first-hand memories of the dot com era can't see Tesla for what it is. Within five years this company will be gone, and it's ridiculous claims will be spoofed as much as we ridicule Webvan and Flooz, and for the same reasons.

  • Report this Comment On November 05, 2011, at 7:41 PM, DenisVinnie wrote:

    baldheadeddork The numbers have never worked??TSLA now has orders for 7,800 vehicles and at this rate could be at 10,000 by the end of the year. That represents $750 million worth of business....With regards to Elon's relationship to Toyota and Daimler, TSLA is providing them with EV expertise, in this domain, he is first "banana"! There are no ridiculous claims, go to the Tesla forums and get informed before passing judgement. Incidentally, good choice in your "Fool username", it suits you!

  • Report this Comment On November 06, 2011, at 12:51 AM, baldheadeddork wrote:

    Hey, I just worked in the auto industry for a decade. What the hell do I know about it?

    Here are the fatal problems with Tesla's numbers: They want to make 20,000 cars a year priced between $55-75K. You can be profitable at 20K units if you price them much higher, or you can survive at that price point if you sell a lot more cars. But those numbers together will not work - period.

    The problem is in production cost. At 20,000 units a year you have to build a full assembly line and that is phenomenally expensive. But at $65K average isn't close to being enough revenue to make that line profitable. They either need to sell a lot more cars at that price point or raise the average selling price to well over $100K.

    Don't believe me? Look at the auto industry and show me someone who has done it. Jaguar sells at that price range and in a bad year they move 50,000 cars. It's been decades since they were able to survive as a stand-alone company. Porsche is profitable, but they produce over 150,000 cars annually and their average selling price is close to the top end of what Tesla is charging for a Model S.

    It's going to be even harder for Tesla because the component costs of the Model S consume a far larger proportion of the sale price. The battery pack on the Model S costs over a third of the retail price of the car at each stage. Tesla is manufacturing the Model S from aluminum, which has substantially higher material and manufacturing costs. Other automakers use aluminum, but not on cars in that price range.

    What's next...You think Tesla is going to sell 2200 cars in the last two months of this year after needing almost three years to get to 7800? Really?

    But let's look at that number and Tesla's claim to eventually sell 20,000 units a year. What makes anyone believe there is a market for 20,000 electric cars a year? The Nissan Leaf costs half as much as the least-expensive Model S, has a dealer network in place that reaches almost everyone, and Nissan has invested heavily in marketing the car. Yet they're going to be lucky to sell 10,000 in the first year and demand has tapered off. I don't think Tesla will have a problem finding ten thousand depositors for the Model S, but the next 5,000 are going to be much harder to sell unless the market has a seismic change.

    You really wrote that Tesla is providing Toyota with EV expertise? Have you ever heard of the Prius? I've worked with Toyota and trust me, they have forgotten more about electric cars than Tesla knows. The only substantive thing Tesla provided Toyota was a taker for the Fremont plant that would have otherwise cost them over a billion dollars to close, clean up and redevelop. The RAV4 EV is a chickenfeed deal compared to what Toyota saved by basically giving Fremont NUMMI to Tesla.

    And I don't care how brilliant you are, if you're a supplier you are the second banana. Musk got smacked down hard by Toyota earlier this year for claiming (in an earnings call) that Toyota was about to announce a billion-dollar deal with Tesla. Daimler won't put up with that garbage, either. Suppliers do not announce deals, and if you think Daimler AG is going to live or die on what they get from Tesla, you're delusional.

  • Report this Comment On November 06, 2011, at 10:29 AM, TMFMarlowe wrote:

    @DenisVinnie: You say "Tesla is offering a technological and not mechanical means of transportation."

    And I say: Baloney. If that's why you invested in TSLA, you have made a mistake. They're cars, not magic transporters powered by fairy dust. And they're not particularly special, technically speaking, they're just a couple of years ahead of the EVs that are already on the way from the (much bigger, much more resourceful, much more experienced) global carmakers. And that lead won't last, because when you get down to it, TSLA doesn't have the resources (or really, the know-how) to compete with the likes of Ford and VW and Toyota (and yes, they WILL be competing with Toyota. Watch and see.)

    Also, it's 6500 preorders, not 7500, or at least that's what Musk told Bloomberg last week.

    John Rosevear

  • Report this Comment On November 06, 2011, at 4:22 PM, DenisVinnie wrote:

    @baldheadeddork If you just worked in the auto industry for the last decade, then you are more than likely in (a) Detroit(state of mind). What you know is passe. Tesla is a forward thinking car company of the Future. The drive train of a Purebrid EV is a feat of technological and less mechanical innovation, once designed and engineered is infinitely less expensive and complicated to build and maintain then that of a ICE V or Hybrid, for that matter. Tesla will not be subject to the same warranty and maintenance expenses that ICE "Dealerships" have had to provide to disgruntled new vehicle owners, costs of which are built into the initial purchase price of the car. I've been to the Fremont factory, the assembly line is built, Tesla has incurred that expense and has has been extremely resourceful in that accomplishment. The average price of the Tesla S will be more like $75k or more since many of the buyers will be purchasing their vehicles with many options being offered....for a vehicle that is comparable to a BMW 5 or Audi A6 and sells for $30k less, it seems like a good value, never mind that it can go the same distance that they can on a single charge\full tank of gas. With regard to the component costs, the only thing that will be outsourced is the battery. Everything will be manufactured in house in the Made in America Fremont factory...good economics. Next.....As of the end of September, Tesla had deposits for 6500 cars, as of the end of October (following the Factory Event at the beginning of the month), the number of deposits jumped to over 7500 cars. Let's see where it will be by the end of the year..?! The next two paragraphs of your blog draw comparisons between Tesla and those Automobile companies that have embarked on the path towards the manufacturing "Hybrids". Tesla is not in that market, they make "Purebrids" (my word), EV's that can go the distance on one charge with performance that is comparable to the best ICE V on the market. When all loaded up with family and friends( 7 passengers) and all their gear (the frunk is as large as most sedans rear trunk), it is capable being a great first class family sedan. When loaded up with all the "bells and whistles" it's capable of being a high class luxury sports car, capable of competing with the M5's, S6's, MB E Class, Porsche's, Maserati's and even the Aston Martin's, of the world,at half the price of some of those. Forget the Prius, Volt and Hybrids, ill conceived, short (pure EV) distance, worst of both worlds "mutts". As for the Nissan Leaf(blower)....range of 70 miles and 0-60 in over 10 sec.'s, a golf cart has better performance. The core of Tesla's business is not that of a supplier to either Toyota or Daimler, but that of a Made in America Automobile Company, in a class all of its own, which I, for one am willing to support! If I'm delusional, then you, my friend come across as disillusioned, I have so much to look forward to, next time I pass you by while your filling up at the Pollution Station, i'll honk! John R The Tesla S is not a magic transporter, its a people transporter, 5 adults, 2 children and a whole lot of gear. Incidentally, it doesn't run on fairy dust, it runs on electricity, at about 1/10th the cost of gasoline and has Zero Emissions. With regard to being only couple a years ahead of the global carmakers, as you know in the world of technology(Silicon Valley), things are measured in dog years. That puts them 14 years ahead of the conventional automakers, which are heavily burdened with legacy commitments, work force, aging infrastructure and tired "technologies?"(Detroit) Tesla has the know how, where with all and are is backed by the single most important players in the equation, Customers. And the numbers are growing exponentially. P.S. Baloney, I don't eat that s...!

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