Is Barron's Right About Tesla?

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Upon publication of a critical article, shares of electric carmaker Tesla (NASDAQ: TSLA  ) slipped four points, showing that investors and analysts have yet to feel assured that the company is here to stay. While it's true that the company faces headwinds, both internal and external, no one should be discounting the amazing feats that CEO Elon Musk and the Tesla team have accomplished in a very short period of time. As is often the case, the question here may not be if Tesla will live up to the hype or not, but instead, whether today's stock price reflects a reality, or market hysteria.

The article
Barron's is one of my favorite financial publications. The writers avoid sensational material in favor of realistic, grounded analysis, and actionable advice. This past week, the company released its latest edition with a cover story reading, "Recharge Now!" The story has two approaches -- one to the vehicles, and one to the stock.

The Model S, Tesla's $90,000 sedan, is widely considered to be the most innovative automobile to enter the market in a long, long time. Barron's both acknowledges and supports this notion.

The vehicle may top 15,000 in sales this year, according to management -- an impressive accomplishment given the short period of time Tesla has been in existence, and the high cost of entry to get in the driver seat. Analysts, and the company itself, believe global sales could top 30,000 units by 2014.

To me, there's no question that Tesla can out-innovate any of the major auto manufactures -- whether in the U.S. or abroad. Willy Wonka-esque CEO Elon Musk is a true miracle worker of our time -- with successes ranging from spaceships to solar panels. His vision cannot, and should not, be disregarded.

The problem
Tesla's stock is a great example of betting the jockey, not the horse. Going up against the big auto companies is something that has been attempted many times, but very rarely achieved with any success -- and Musk seems to be a part of that minuscule population. The issue, though, lies in its market value and the progression of technology.

As written in the Barron's piece, Tesla's $100-plus stock price doesn't reflect a company with 15,000, 30,000, or even 60,000 units sold annually. It reflects a car company selling well into the six figures (and not on the sticker). To even approach this, Tesla needs a car under 50 grand. Given the enormous cost of the batteries (far above $10,000), this is a huge problem. Musk claims the Gen III Tesla will be priced at this level, but the technology will need to improve, and bring costs down, at an unprecedented rate to make it feasible.

Investors paying 100 times earnings for this company are assuming this will be done, no problem, and that the company can then move on to scaling the operation quickly and effectively.

An investment thesis that relies on a single event taking place in 2017 -- expected release of the Gen III -- is speculative. If that's within your comfort level, by all means buy. But for most, I recommend heeding Mark Twain's words: "There are two times in a man's life when he should not speculate: when he can't afford it, and when he can."

More from The Motley Fool 

Tesla's plan to disrupt the global auto business has yielded spectacular results. But giant competitors are already moving to disrupt Tesla. Will the company be able to fend them off? The Motley Fool answers this question and more in our most in-depth Tesla research available. Get instant access by clicking here now.

Read/Post Comments (11) | Recommend This Article (7)

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 13, 2013, at 10:43 PM, jamesdan567 wrote:

    Everyone who has a hybrid car wants an EV. Do the math.

    You never see an EV at a gas station. Think about that.

    in March 2013, 100% of all new energy generation brought online in the United States was solar.

    Solar produces electrons from free photons. EV's use electrons

    EV's are 300% + more efficient than ICE cars at moving the car forward and obviously contribute vastly less pollution into the atmosphere.

  • Report this Comment On June 14, 2013, at 1:08 AM, StanO6 wrote:

    "The writers avoid sensational material in favor of realistic, grounded analysis, and actionable advice."

    Let me remind you: Wang, Moulitsas, Silver all predicted a 2012 Obama win. Nailed the EVs. Barron's? Not so much! They predicted a Romney landslide. Actionable advice? Sorry, no.

  • Report this Comment On June 14, 2013, at 3:42 AM, Marshgre wrote:

    Read both articles. (This and Barron's)

    To answer the question in the title, NO.

    Mr Musk ended the interview with good cause - from the questions it was obvious to Mr. Musk that the reporter had not done adequate research into how any technologies pricing structure works. All consumer technology gets cheaper over time. To ask if somehow this will magically reverse shows that the Barron's reporter was only interested in writing an article with a contrary position to reality.

    There are enough challenges with bringing an automobile to market without inventing some sort of backwards world where a smaller lighter car will somehow need a larger more expensive battery to achieve the same range as the existing model.

  • Report this Comment On June 14, 2013, at 3:58 AM, jamesdan567 wrote:

    Obviously, the present Tesla market valuation anticipates the sale of around 1 million vehicles a year if you look at Tesla as an auto company. However, Elon is looking to change practically the entire energy paradigm of the world to a sustainable basis.

    EV's are fundamentally more efficient. Their 100% adoption is inevitable. Musk has built a 12 story tall rocket that can take off, hover, and land vertically (the SpaceX Grasshopper).

    Building a mass market affordable electric car is a piece of cake compared to that. FYI

  • Report this Comment On June 14, 2013, at 4:46 AM, TurbulentTime wrote:

    If the author does not believe in Tesla, either stay away from owning the stock, or consider short-selling it's stock. For me, life is simple, I believe in break-through technology, and I surely believe in Elon Musk and his plan for Tesla Motor. I have no doubt even when I first learned about Tesla back in 2006 when I and my classmates joined a conference at University of California, Berkeley about the future of sustainable energy and how new companies were dealing with existing problems that may slow down such adoption of new technology that lead us to sustainable future. One of the problems acknowledged was the feeling of being insure by the major auto makers to continue to put money in EV researches due to initial lack of interest from the public about the mediocre EVs that they all had produced. Things changed when Tesla Motor started its planned execution. As the new generation, I firmly believe in Tesla Motor. Gasoline cars remind me of the Sony's Ericsson phone and Blackberry phone and the likes. They were hip and professional until people were awakened by iPhone. Only the minds of limited ability cannot think of upcoming breakthrough from Tesla Motor.

  • Report this Comment On June 14, 2013, at 5:15 AM, Soflason wrote:

    The emphasis in the Barron's piece was the same false assumption in your article: "Given the enormous cost of the batteries (far above $10,000), this is a huge problem" -- this false assumption is the reason Elon Musk terminated the interview, the journalist simply did not research or comprehend battery costs relative to Tesla. The lower cost "Gen III" Tesla is very achievable based on battery costs so the whole piece is ungrounded.

    How? Turns out Barron's false assumptions have been meticulously taken apart and exhaustively researched in a far more revealing follow-up piece:

    Furthermore, Panasonic (Tesla's battery suppliers) provided further evidence with an important Press Release immediately following the Barron's piece:

    The Barron's piece is inaccurate and it's assumptions were unfounded.

  • Report this Comment On June 14, 2013, at 7:00 AM, gotaub wrote:

    I'm betting on Tesla, and think/hope they make it in the long run. But I think their stock is currently over valued.

    If you buy today at the current price and hold onto it long enough you may likely see decent return someday.

    But at some point the company will stumble. Either the model X will be delayed, or their will be some quality control issue.

    They will get some bad press and the stock will drop dramatically. This is not wild speculation, but rather what often happens when a stock value is based mostly on hype.

    That is probably the best time to buy. Tesla has shown that it has good management and will likely recover from such a stumble.

  • Report this Comment On June 14, 2013, at 7:58 AM, Tooldev wrote:

    In the past 100 years we came a long way refining the efficiency of gas engines but Fundamentally IC engines are extremely inefficient. At its core you have chunks on Metal continually reversing direction. Ev vehicles will replace ic cars, no doubt. It's a long road and some companies have failed. The pressure is on and a breakthrough is eminent. Once that happens we can refine the battery technology. I believe this breakthrough company to be tesla! My money is riding on it.

    I am not betting on the jockey, but the fundamental technology! It does take a good jockey to shatter the mold and elon musk is the right man for this. We should not forget that he has build an infrastructure build on sound business and engineering principals.

    I will go as far as saying, if tesla fails, an other tesla will come along, the technology will prevail.

  • Report this Comment On June 14, 2013, at 9:26 AM, Grumpycat wrote:

    The future energy source for 'cars' will not be electric.

    Electric is only a temporary milestone to a vastly more efficient energy source that does not require it be stored in large, bulky and expensive batteries. Also, 'cars' with rubber tires traveling on roads will be obsolete.

  • Report this Comment On June 14, 2013, at 9:36 AM, chinesebuffett wrote:

    I'm interested to see what the community thinks of the DOE loan, Tesla convertibles (with a 30-35% conversion premium, today's 506 D unregistered securities. By my way of thinking this is Tesla struggling to raise capital. If the company is struggling to raise capital now, how is it going to have the funds to grow into the share price? I'm not buying that Tesla paying the DOE loan early is a good thing. Instead a way to generate funds without shaking up the market. (guise it as the company performing a noble feat for the American Taxpayer)

  • Report this Comment On June 14, 2013, at 12:19 PM, spawn44 wrote:

    Tesla will succeed providing everything the TESLAITES hope for comes true. However, a few things to consider. Projected sales are low. Producing a lower end vehicle before the company is solidly profitable another. Initial demand was strong, is it continuing.

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