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Why I'm Not Buying Tesla Motors

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 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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Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Ford Motor and Zipcar. Motley Fool newsletter services have recommended buying shares of eBay, General Motors, Ford Motor, Zipcar, and Tesla Motors. Motley Fool newsletter services have recommended writing puts in eBay. 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.

Read/Post Comments (12) | Recommend This Article (14)

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 December 13, 2011, at 3:57 PM, DaveGruska wrote:

    I agree that this is a risky pick, and it will take a long time to tell if it even is a good pick, but I'm along for the ride with a small speculative position for now, and will add on the dips.

    The Morgan Stanley report is laughable, and it was amazing to see Tesla's shares get hit so hard over it (even as it praised Tesla's execution so far) - I guess investors are really nervous.

    To me, the big boys don't really get it, and I doubt they will for a long time. People don't want ugly EVs w/ very limited range, and while hybrids address "range anxiety" in the near-term, they still require all the maintenance of an internal combustion car, and introduce even more complexity.

    I think that by the time EVs really catch on, Tesla will have cred like Jeep did with 4x4s, and will do just fine.

    As for Zipcar, it would do well to embrace EVs. Zipcar has lots of overhead w/ maintenance costs.

    Internal combustion engine cars can coast to a stop as well (mine just did last week after my alternator died w/ just a few minutes "warning" - my airbag light turned on). Battery technology keeps improving, AAA is already starting a test program w/ EV charging trucks, and ideally, solar may provide the ultimate eliminator of range anxiety (though it's nowhere near efficient enough yet - the Fisker Karma's solar roof is a joke and a waste of money).

    The run of Model S cars is small enough that Tesla is not taking on too much risk - and will even create demand. But the car better be next to perfect...

    I think the biggest reason to own Tesla shares is Elon Musk. As you pointed out, he has quite a resume. I was also encouraged that Musk is looking beyond Lithium Ion for future EV cars.

    Tesla is in the "valley of death" stage right now of the new product lifecycle, though, making it one hell of a risky investment. I think investors now will either make a ton of money, or lose it all.

  • Report this Comment On December 13, 2011, at 4:37 PM, SMOKEN42 wrote:

    THIS COMPANY WILL" ONLY- SURVIVE" IF THEY, "SELL -IT" TO A MAJOR AUTO COMPANY !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  • Report this Comment On December 13, 2011, at 4:39 PM, SleepingDog355 wrote:

    The main concern for Tesla is of course whether or not they will be able to meet their delivery schedule. So far Tesla has executed very well, and the folks working there are very highly motivated (their most valuable asset in my opinion). Given this, betting that they won't deliver on time is, in my opinion, a bad bet.

  • Report this Comment On December 13, 2011, at 5:04 PM, soflainvestor wrote:

    One fact seems to be missing in most discussions of Tesla—they have almost 8,000 reservations for the car (as of today) and every one of them requires a $5,000 (refundable) deposit. Their first year of Model S production is sold out! And it's likely that their second year of production (20,000 vehicles) will also be subscribed before the end of 2012. That's impressive.

    Sure, there are risks, but Tesla intends to sell into the mid-luxury market where high volume is not a issue. They claim that their margins will be in the 25 percent range; they have a 5-star crash rating; they are very high performance (0 to 60 in 5.6 seconds); the car seat five adults comfortably and has more storage space than some small SUVs; their tech is far superior to any other EV,; they get the equivalent to 106 mpg, and the Model S is beautiful (google it)—it will create buzz wherever it goes.

    I'm not sorry I hold TSLA. I think it's a good play.

  • Report this Comment On December 13, 2011, at 7:50 PM, edge42 wrote:

    I feel about Tesla the same as I do about hybrids or full-on electrics. They are a bad buy. For instance; battery tech is advancing so fast that when Prius owners try to unload their cars in two or three years no one will want them with their then outdated battery packs. And you can bet the manufacturers have made it expensive to swap to the latest tech, or maybe even impossible. Betting that technology will essentially sit still for two or three years is a poor play.

  • Report this Comment On December 13, 2011, at 9:40 PM, davidbasson wrote:

    I agree with your thoughts regarding Tesla. What do you think about another competitor .. Fisker ?

    Are you aware that they are setting up an IPO. ?

  • Report this Comment On December 14, 2011, at 1:15 AM, spectechinvest wrote:

    This is the perfect time to start looking at adding to a position in TSLA, here are my reasons in this post:

  • Report this Comment On December 14, 2011, at 3:29 AM, stra6128 wrote:

    I have a Tesla roadster > 10,000 miles and no battery degradation. Driving it is a dream - the regen brakes take a competent driver about 30 seconds to adjust to. Haven't gone to a gas station in almost 11 months and loving it! Most of your opinions are speculative - electrification is coming fast. I recommend you avoid buying Tesla stock (Gee - I've made $15,000 profit so far this year) so you can match Motley Fool's overall dismal record (I used to be a multiple subscription holder).

  • Report this Comment On December 15, 2011, at 2:20 AM, F2JP wrote:

    I have to wonder how Morgan Stanley Analyst Adam Jonas and yourself can consider yourselves authorities on anything investment related?

    You seem so intent in detailing the risks, snd shortcomings in Tesla and the EV environment that you fail to research your own statements, and you completely ignore the bigger picture.

    Tesla Dropped 11.1% on Dec.8th. How much did the DOW drop? How much did Ford, GM, Chrystler drop? Maybe the Morgan Stanley report was so powerful that it dragged them down too? Natural Gas dropped over 24% on the 8th, more than twice what Tesla dropped. I must have missed the Adam Jonas statement that Natural Gas had no future because it didn't smell as good as root beer.

    What is the warantee on the Nisan Leaf Battery? Did you research it before commenting on EV Battery longevity? It's a 10 year warantee. Nisan will replace any failing cell, or battery for the first 10 years. All the owner has to do to qualify in bring the car in for a free checkup once a year. How many cars have you owned for 10 years?

    What will the warantee be for the Model S? Did you research it before making negative comments on EV battery propagation?

    I expect that that EV battery technology will evolve, but given the size of an investment needed to research, develop, and build out manufacturing, it will not evolve at fast enough a pace to make your prediction of premature obsolescence likely. I also believe that evolving the vehicle in tandom with battery technology will be a part of the plan. Have you been to a nisan Leaf Drive Event? If you haven't maybe you and Adam Jonas should catch one. Then you would know that it is.

    The Tesla Model S has three configurations. The highest one is designed to get 300 miles per charge. It also is the model with the most reservations. The refundable $40,000 reservation is the one selling out the fastest. HMMM, does that spell commitment?

    There are a lot of investors making money with Tesla, maybe you could do a little more research, and figure out how? Unless you are sitting on a pile of shorts???? Kinda Makes Ya Go HMMMMM???

  • Report this Comment On December 15, 2011, at 8:41 AM, cjate8 wrote:

    Motley has always shunned Tesla. If a 40% gain since my purchase of the stock is "crushed" I will take the crush. True I was up 60% untill the Jones' report but I will bet (with more investment on my part) that Tesla rebounds here shortly. If Motley can show me another investment that will return 40% in a year I would like to see it.

  • Report this Comment On December 15, 2011, at 4:49 PM, GDPerks wrote:

    > drill down into the risk factors section of Tesla's latest Form 10-Q and there are even more reasons to wonder

    10-Q's of every company I've read lists enough risks that, if you let them concern you, you'd never invest ever again.

  • Report this Comment On September 24, 2014, at 9:36 AM, chopchop0 wrote:

    Humorous to read articles like this in retrospect.

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