This article is part of our Rising Star Portfolio series.
I almost decided to purchase Tesla Motors (Nasdaq: TSLA ) for the socially responsible Rising Star portfolio I'm managing for Fool.com after the stock plunged last week. But the more I thought about the company's risks, I had to put the brakes on the urge to buy.
Time for a test drive?
Morgan Stanley analyst Adam Jones downgraded Tesla shares and reduced his price target to $44 from $70. He also downwardly adjusted his expectation of the electric vehicle (EV) market in general, predicting that penetration will only reach 4.5% in 2025, instead of his previous expectation for an 8.6% share.
Tesla shares have gotten crushed since Jones' call, and the contrarian urge ran strong considering how often "experts" are wrong. Fluctuating gas prices, affordability, and rates of consumer adoption of green alternatives make forecasts about this market's fate in 2025 more than a little "iffy."
Much of the buy temptation relates to the fact that Tesla has already designed one heck of a gorgeous electric car: the Roadster. Next year Tesla will begin delivering a more down-to-earth electric vehicle, the Model S. The Model S will zoom from 0 to 60 in less than six seconds, and it will boast the longest range among electric vehicles: up to 300 miles on a single charge.
The Model S should attract a far more mainstream customer base, since its price won't be as daunting; the lowest-end Model S is expected to cost about $50,000, versus the Roadster's $100,000 price tag. As of October, 6,500 people have put down $5,000 deposits in order to reserve a Model S.
Tesla would be a gutsy pick, too. Co-founder, CEO, and Chief Architect Elon Musk is pretty bold to take on the entrenched auto industry in the first place. He cofounded PayPal (now owned by eBay (Nasdaq: EBAY ) ), and he also serves as CEO and CTO of SpaceX (that's right, rockets). He was also named Innovator of the Year in technology by WSJ Magazine in October. He's got quite a history with progressive start-ups that could potentially change the way we live.
Speeding along the road of risk
Still, the more I dug into the company, the more I realized this stock's still simply too risky for me. (I looked at it last year, too.) Tesla is unprofitable, and analysts don't expect profitability until the year ending December 2013. The Model S launch will require higher-volume manufacturing than the Roadster did, and this will be a completely new hurdle for Tesla. In addition, production delays could occur, causing Tesla to fall short on revenues and take on more debt.
Tesla will only have a limited number of Roadsters left for sale in 2012, so the top line could dwindle significantly before the Model S launch. Investing in Tesla now would probably require nerves of steel next year.
Old-school stalwarts like General Motors (NYSE: GM ) and Ford (NYSE: F ) have been in the car manufacturing business for decades, and they're offering cars with green profiles, too. GM offers the Chevy Volt plug-in hybrid, as well as an all-electric car in 2013, the Chevy Spark. The Nissan Leaf is a 100% electric vehicle with a far lower price tag than the Model S will have. And of course, hybrids like Toyota's (NYSE: TM ) Prius and Honda's (NYSE: HMC ) hybrid offerings already enjoy credibility with green consumers.
There's also the possibility that driver behavior will change dramatically; car-sharing upstart Zipcar (NYSE: ZIP ) encourages ditching cars altogether. For every Zipcar, 15 personally owned cars are no longer riding the roads, and after joining the service, 90% of "Zipsters" drove 5,500 miles or less per year.
In addition, drill down into the risk factors section of Tesla's latest Form 10-Q and there are even more reasons to wonder about widespread adoption. Tesla's vehicles work differently than traditional cars, and the company warns that "customers may experience difficulty operating them properly."
Given some of our fellow drivers' difficulties exercising the presence of mind or common sense to use a turn signal properly, well, you've got to wonder if many of them are ready for futuristic electric cars. If drivers allow Tesla's batteries' charge to deplete too much, speeds will slow and eventually the cars will coast to a stop, for example. Apparently this will occur after several warnings, but hey, it's not exactly unheard of for folks to ride the old-school "low fuel" warning until it's too late. Those red gas cans haven't become obsolete, after all.
In addition, over time, the range the vehicles can travel on a single charge deteriorates. Tesla believes that the battery pack for its Roadster will retain 60%-65% of its ability to hold its initial charge after seven years or 100,000 miles, but anybody who's ever gotten annoyed at laptop batteries' depreciating life might not relish the thoughts of a similar situation with a pricey automobile.
Put on the brakes
Tesla's a fascinating company. However, when I realized the list of formidable potential risks was piling up far higher than compelling reasons to buy right now, I decided to resist this stock, despite its undeniable cool cred. What do you think? Share your thoughts on Tesla in the comments box below.
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