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Tesla's Patent Giveaway Doesn't Solve Its Niche Problem

Tesla Motors (NASDAQ: TSLA  ) is a maverick. CEO Elon Musk's flare for publicity recently took an interesting turn: Tesla is giving its patent portfolio to the world! Is this about open technology, though, or is it about money? S&P labeling Tesla's debt as junk suggests the latter. 

The green thing
There's no question that building an all-electric car gives Tesla Motors serious "green" credentials. That's taken the automaker pretty far, especially considering that it's only turned a profit in one of the past 10 quarters. That profit came in the first quarter of 2013, when Tesla Motors earned a dime per share; it's lost more than $5.50 a share across the other nine quarters.

Interestingly, despite the red ink, Tesla shares are up more than 475% since the start of 2013. That includes a recent price drop of nearly 30% at its nadir, as well. The drop suggests reality might be starting to sink in for some star-struck investors, though. Part of the problem is that Tesla still has a lot of money to spend (the so-called Gigafactory is a prime example) if it wants to get electric autos out of what S&P has labeled a "niche."

TSLA Chart

TSLA data by YCharts

Debt matters
In fact, operating in a niche was one of the biggest problems highlighted by S&P when it assigned a junk rating to Tesla Motors' debt. S&P's call fits well with CEO Musk's comments too: "Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world's factories every day." That's why Tesla Motors has opened up its patent portfolio to the world, hoping that enough competitors will jump in to create a meaningful electric car market.

Right now, however, Tesla Motors is stuck with a junk debt rating. That means that investors will be less willing to pay top dollar for its bonds despite the auto maker's "green" credentials. That's why investors should be worried about Tesla on the debt and, frankly, stock side. With the CEO conceding that electric cars are a niche right now, the immediate future isn't all that bright.

"Green" is good, though, and there are other options for getting on board the environmental bandwagon. For example, SolarCity (NASDAQ: SCTY  ) , another money-losing company, installs solar panels on the roofs of homes and businesses. That carries just as much green credibility as making an electric car—maybe more!

There's more to like here than at Tesla Motors, too. One of the core business practices at SolarCity is to securitize its solar installations to raise money for growth. It's planning on opening up this process to individual investors, which means that you can get in on this action, too. Unlike Tesla Motors' debt, SolarCity's solar array bonds are investment grade.

Part of the reason is because SolarCity's installations will live on if SolarCity itself goes belly up. This means that when looking at these securities, SolarCity's red ink doesn't play a big role. Even SolarCity itself is a more interesting option than Tesla Motors, though. First and foremost, solar is no longer a niche—it's a rapidly expanding alternative to carbon-based power. That growth still has a long way to run, with the U.S. Energy Information Administration (EIA) suggesting that it will be among the fastest-growing areas of the renewable market.

Source: EIA

Big and getting bigger
Solar power is moving past niche status and appears to have plenty more growth ahead. That alone makes SolarCity a more interesting option, both debt and stock wise, than Tesla Motors as Musk appears to openly admit it's a market still in its infancy. SolarCity is also on the verge of getting really big in the solar space, too, with expectations of hitting a gigawatt of installed capacity by the year's end. For comparison, it had just 30 megawatts installed in 2010. If that kind of growth continues, as the EIA suggests it will, SolarCity could become a real threat to the traditional utility industry and a valuable asset for debt and equity investors along the way.

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Comments from our Foolish Readers

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  • Report this Comment On June 26, 2014, at 6:50 PM, NCIC wrote:

    So Tesla cars will go away if Tesla goes belly up? Hmmm, that didn't happen to Fisker.

    Electric cars are a niche, but seem to be getting the fast-track in many countries in order to make it a mainstream product, including China..the largest car market in the world. Free fuel incentives by Tesla, Nissan and, probably soon, BMW will also encourage purchasing and quick adoption of the technologies.

    Dump your shorts!!

  • Report this Comment On June 27, 2014, at 5:35 PM, Ustauber wrote:

    Boycott reading the negative articles from Seeking Alpha, they are shorting Tesla stock.e

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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