Is Tesla Motors About to Redline?

When Back to the Future II came out in 1989, I remember thinking how great it was going to be to own a flying car in 2015. More than 20 years have since passed, and sadly, we're no closer to that dream. (To say nothing of hoverboards.)

I've been even more depressed by the lack of growth we've seen in the electric vehicle arena. This hasn't stopped Tesla Motors (Nasdaq: TSLA  ) though from rocketing to a new 52-week high, as its tie-up with Toyota (NYSE: TM  ) resulted in an electric version of the RAV4. Despite a $50 million investment from Toyota and this partnership, I can't help but feel that Tesla is priced for perfection, and could be ready to redline.

Bottom-line blues
A company's financials generally drive a stock higher. But Tesla's case, they send me scurrying for cover. Remember, Tesla is a very long way from turning a profit.

Revenue growth has hit a roadblock, and despite investments from Toyota and Panasonic (NYSE: PC  ) , Tesla has already burnt through nearly $94 million this year in cash from operating losses and another $23 million in capital expenditures. Given its most recent quarterly report, Tesla's $96 million cash on hand leaves the company with less than one year of cash viability, almost guaranteeing the possibility of a secondary offering coming to market and diluting shareholders.

David & Goliath(s)
It's bad enough being the small kid on the block; it's even worse when your competition has a vast network of dealerships, more cash and advertising capability, and the ability to take a significant chunk of your monopoly away.

In my opinion, Tesla simply doesn't have the infrastructure to compete against Nissan, GM (NYSE: GM  ) , or Ford (NYSE: F  ) . Each of these companies appears ready to debut an electric vehicle either before or not long after, Tesla's $50,000 Model S sedan takes the stage.

The takeaway
I think the lesson here is that being the pioneer in your field doesn't necessarily create a successful outcome. Tesla still has plenty of time to prove itself and prove me wrong. But right now, people are essentially paying nearly $3 billion for the intellectual property rights of Tesla (which may ultimately prove more valuable than the cars themselves). Barring a major pullback, I don't see how Tesla will live up to expectations.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name UltraLong. Ford is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Motley Fool's disclosure policy just found the strangest sports almanac.


Read/Post Comments (23) | Recommend This Article (18)

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  • Report this Comment On November 22, 2010, at 7:23 PM, haid1 wrote:

    The latest in a string of "Tesla is not making profits" articles. Same points. It was true at 23. It was true at 28. Now its true at 33. And it will continue to be true until they have their Model S, in 2 years time.

    This stock is not about current profit. When I was in Computer Science in college, I didn't have past profit to indicate my future earning potential. Likewise, Tesla is investing in a market segment that appears to be growing. How large? who knows. Thats why its difficult to know if 23 or 65 is a proper valuation.

    The fact that they have a drive train supply business to other car manufacturers means that Tesla is not solely dependent on consumer Car sales. Every announcement where we see "Powered by Tesla" (or some such) means Tesla has an improved probability of being profitable. So yes the stock goes up.

  • Report this Comment On November 22, 2010, at 7:25 PM, cokenfries wrote:

    I think the claim that investors are paying $3 billion for intellectual property is a little unfair. They do have a drive-train and car manufacturing facility, as well as a network of dealerships. They are selling cars, and they are supplying other companies with drive-trains, so it's not as if Tesla is just a pile of paper.

    As far as the competition, I think it comes down to whether or not consumers will buy a car based on the fact it's electric. If they do, then Tesla doesn't really have any near term competition because there is no other company making all electric luxury sedans (well...the Volt sort of), but if the market doesn't saturate anytime soon there may be plenty of room for Tesla. If it really comes down to the driving experience, then it's possible consumers may see a real performance advantage of an electric sedan over similarly priced gas powered cars.

    Then again, maybe not. It'll be interesting to see where it goes either way!

  • Report this Comment On November 22, 2010, at 7:43 PM, CLmason1 wrote:

    Your comment that "Tesla's $96 million cash on hand leaves the company with less than one year of cash viability, almost guaranteeing the possibility of a secondary offering coming to market and diluting shareholders." is incorrect and misleading.

    Tesla still has over $400 million available from their DOE loan.

  • Report this Comment On November 22, 2010, at 7:52 PM, nonqual wrote:

    The article is a little misleading on the cash availability. TSLA has about $350 million left on the multi-draw DOE loan.

    The IPO was projected @ $14-$16/share; it went off at $17. Not much has changed since the IPO, other than the TM may spend up to $60 million on yet-to-be-defined goods and services and Pansonic bought $30 million of newly issued shares. The CFO is expert at hide the ball mismatching of revenue and expense, viz. the one profitable month in July '09 by a company that's lost nearly $300 million since inception.

    The game has always been whether Musk can go from assembling 500 kit cars a year to manufacturing 20,000 ground-up new models a year (and selling them (for a profit)).

  • Report this Comment On November 22, 2010, at 8:30 PM, nonqual wrote:

    This stock will be easy to manipulate for about another five weeks. Only about 15 million shares were registered in the IPO; there was another registration of about 25 million shares related to employee benefit plans at about the same time, but most of those shares may not be available for trading by the terms of those plans. The NASDAQ site shows about 11.2 million shares held by institutions and mutual funds as of the end of September and about 6.6 million short as of the end of October. (Do the institutional shorters have a way of borrowing mutual fund shares?) At the end of December, the lock-up expires and 50-55 million more shares may be available for trading.

  • Report this Comment On November 22, 2010, at 9:06 PM, superfastmatt wrote:

    I have a Google alert for Tesla Motors because I own this stock and I'm endlessly amused by the never ending string of "OMGSELLTSLA" posts on Motley Fool. At 20: sell TSLA, at 22: sell TSLA, at 25: sell TSLA, at 28: sell TSLA, and on and on up the ladder. If I shorted 50 shares of this stock every time you told me to, I would have had to sell my house by now to cover my losses.

    I'll start thinking about selling about the time Motley starts telling me to buy.

  • Report this Comment On November 22, 2010, at 10:06 PM, BobMichigan wrote:

    So, the good thing about Tesla is they have a government loan.

    I thought GM was government motors....

  • Report this Comment On November 22, 2010, at 10:46 PM, foolgeezer wrote:

    Please....someone name ONE auto startup that has succeeded.

  • Report this Comment On November 22, 2010, at 10:57 PM, fhuang3 wrote:

    Anyone knows the government loan terms? What is the interest cost?

  • Report this Comment On November 23, 2010, at 2:50 AM, TMFUltraLong wrote:

    CLmason1 & nongauil,

    True point, but I don't see Tesla being able to resist the temptation of issuing shares here at $33 when they know that the prospect of profitability is a long ways off. They can and will draw down on that loan, but I'd be surprised to see them go the next year without an offering of some sort.

    UltraLong

  • Report this Comment On November 23, 2010, at 7:42 AM, govreg wrote:

    I think it is ironic (or maybe purposeful) that Sean chose to reference Back to the Future in his article since the Delorean was picked as the car of choice to travel through time. Tesla will end up going the way of the Delorean. Tesla may have batteries and a motor, but the devil is in the details when it comes to producing a car and Tesla doesn't have the experience to produce a safe, durable, reliable (over 10 years) vehicle. Anyone can build a small volume, high priced car, not everyone can build a car for the masses.

  • Report this Comment On November 23, 2010, at 8:11 AM, nonqual wrote:

    UltraLong:

    I don't think there will be a secondary offering of newly authorized shares until it becomes painfully obvious to Musk and Ahuja that the IPO proceeds and DOE loan are near exhaustion and Model S revenue is insufficient to fund the enterprise.

    The nearer term threat to a share price collapse is the release from lock-up of the remaining ~55 million authorized shares. Most of those holders, except TM and Panasonic, have a basis under $5/share. Musk has been able to avoid giving any meaningful information about the details of the Model S schedule so no one can track whether sufficient progress is being made. Time will tell, but if the pre-IPO investors begin selling around the beginning of the year it will be a pretty good indicator that they don't have enough confidence to wait until the second half of the decade when the first quarterly profit is reported.

  • Report this Comment On November 23, 2010, at 9:24 AM, nonqual wrote:

    fhuang3 :

    Discussion of the DOE loan facility begins on page 95 of the IPO prospectus:

    http://ir.teslamotors.com/secfiling.cfm?filingID=1193125-10-...

    Some excerpts:

    Advances under the DOE Loan Facility accrue interest at a per annum rate determined by the Secretary of the Treasury as of the date of the advance and will be based on the Treasury yield curve and the scheduled principal installments for such advance. Interest on advances under the DOE Loan Facility is payable quarterly in arrears...

    As of March 31, 2010, we have received draw-downs under the DOE Loan Facility for an aggregate of $29.9 million with interest rates ranging from 2.9% to 3.4%. As we continue to borrow under our DOE Loan Facility, interest rates will be determined by the Secretary of the Treasury as of the date of each loan, based on the Treasury yield curve and the scheduled principal installments for such loan

    In connection with our loan facility from the United States Department of Energy, or DOE Loan Facility, we have issued the DOE a convertible warrant to purchase up to 3,085,011 shares of our common stock, assuming the automatic conversion of our convertible preferred stock into common stock, at an exercise price of $7.54 per share, and a warrant to purchase up to 5,100 shares of our common stock, at an exercise price of $8.94 per share. The shares subject to the warrants will vest and become exercisable beginning on December 15, 2018 in quarterly amounts through December 14, 2022 proportionately based on the average outstanding balance of the loan during the prior quarter. If we prepay our DOE Loan Facility in full or in part, the total amount of shares exercisable under the warrants will be proportionately reduced. If not exercised, these warrants will expire after December 15, 2023. Upon an event of default either arising from a change of control or any other event of default that is not cured after a certain period, the warrants will vest with respect to all unvested shares then remaining under the warrants. Prior to December 15, 2018, the warrants are transferable by the DOE only to other federal agencies of the United States government. After December 15, 2018, the warrants are transferable to any other person or entity. The warrants contain provisions for the adjustment of the exercise price and the number of shares issuable upon exercise in the event of stock dividends, stock splits, reorganizations, and reclassifications, consolidations and the like.

  • Report this Comment On November 23, 2010, at 3:44 PM, HenryT8 wrote:

    I am sick of this site bashing Tesla and I am also sick of the nondisclosure of the fact that the site has a vested interest and holdings in Ford. Come on, Fool -- don't take us for fools.

  • Report this Comment On November 23, 2010, at 5:18 PM, lab626 wrote:

    I want a SUV and I want it to be Electric! I am really excited to get a Rav4 in 2012! Go Tesla!

  • Report this Comment On November 23, 2010, at 8:26 PM, AliceBLT wrote:

    I think Tesla is like Apple. In spite of the practical hurtles, people respond to the absolute beauty and rightness of the car. It won't be about metrics or finance. And yes, it will take years before they stumble upon anything like a mass market item. All they need to do is keep going.

  • Report this Comment On November 23, 2010, at 11:22 PM, gi1man wrote:

    If the Motley Fool writers knew anything, they would be making money instead of dispensing bad advice. Funny how a previous commenter points out that MF has a stake and potential conflict of interest in Ford given the rumors around Ford acquiring Tesla.

  • Report this Comment On November 26, 2010, at 4:07 AM, rspierce wrote:

    Tesla stock price just doesn't make sense to me. Now it's gone all the way up to $35 per share.

    Tesla is a company that has been losing millions of dollars a year since it started (that's 7 years now), doesn't have a profitable product, and the top tier executives (3 excluding Musk) are pulling more than $500,000 a year out of the company in salaries. Musk has practically no salary bit is pulling out much more via his stock options (if I understand this stuff correctly, to the order of $30M per year).

    Tesla has a history of not delivering on their plan (I won't say promise) for product development and deployment. So where is the value in Tesla stock coming from? You financial wizards must know something that regular dudes like me don't. Or maybe Musk is just so well connected that he's able to pull off what seems like financial magic.

  • Report this Comment On November 27, 2010, at 12:59 PM, Jazzenjohn1 wrote:

    Ford acquiring Tesla?!? How totally absurd! What could Tesla possibly have that Ford would pay even a tiny bit for? Technology? Tesla doesn't have anything worth anything. It is a battery powered car. Motors aren't unique, batteries aren't unique to Tesla, Controllers have been around for generations and their differences are minor, Regenerative braking has been around for generations too. What exactly would Ford buy that could possibly be worth 3 Billion dollars? If the Tesla cars were all that advanced compared to everyone else, Why can't they sell very many of them, and none for a profit? This company is a loser, a fantasy toy built by a fabulously wealthy man who was deluded into thinking that because he knows quite a bit about computers he knows something about cars. Wrong. He is quite adept at not losing as much as he really should on this, thanks to investors who are more interested in the hype than the reality.

  • Report this Comment On November 27, 2010, at 10:40 PM, indirachap wrote:

    I think this stock will go up and down like a yo-yo. At the moment it is speculation. Buy low and sell high until the fundamentals improve. My cousin works for a British EV maker and he tells me that things are very quiet on his front with the factory almost moribound. Apparently there are a lot of issues with new technology which have yet to be sorted out by his particular firm . I don't know anything about Tesla though other than it is an EV maker and thus cannot comment.

  • Report this Comment On November 29, 2010, at 1:50 PM, Ironbob wrote:

    All of America cannot wait for a $150,000 electric car! We just can't WAIT to buy a car that is $120,000 more than the car America usually buys but HEY, you're going to save the planet by giving the world a car that runs on electricity! Electricity that is generated at a coal plant! Wow! Coooool!

    YES! I'm an American dag-nabit and that means I have the right to be stupid! Oops! What's this you're saying! I actually have to sink 10-20K into replacing the batteries later on! No, problem! I'm an American and I have the right to go bankrupt while saving the planet!

    Tesla, one of the greatest boondoggles ever but no worries! If we can go bankrupt before 2012, we can get Jerry Brown and Obama to bail us out! YEAH!

  • Report this Comment On November 30, 2010, at 1:42 AM, fr3sh wrote:

    "All of America cannot wait for a $150,000 electric car!"

    lol @ commenting on something that you know nothing about.

    The Model S, which is expected to be released in mid 2012, will sell for $50k after the tax credit. With the money that you'll save on fuel costs and maintenance it'll cost much less than any other luxury sedan in its class, with comparable power, awesome styling, more cargo room and a 5 star crash rating why would somebody want a traditional car?

    "What could Tesla possibly have that Ford would pay even a tiny bit for? Technology?"

    lol @ you. Apparently their power train technology was so impressive that Toyota invested $50+ million into Tesla and has contracted them to produce the power train for the new Rav 4 EVs.

    Aside from the endorsement from Toyota, Telsa has out performed any EV that has been presented to the market yet. So far the big auto makers have offered EVs that are under powered, ugly and have a laughable range of 100 miles or less.

    Tesla, on the other hand, will introduce the Model S with a minimum 160 mile range and power to produce 0-60 in 5.6 seconds with a top speed of 120 mph. Not to mention the amazing styling that none of the other EVs can hold a candle to.

    Bottom line is that Tesla's Model S will be able to out perform all EVs and most traditional vehicles while not using a single drop of gasoline, saving thousands of dollars on fuel costs a year, and priced comparably to cars in its class.

    Infrastructure is the only advantage that traditional vehicle have over it and eventually that'll fade too.

    Tesla is the future.

    Call me when any of the big automakers can even come close to matching that with the crap EVs they're putting out now.

  • Report this Comment On December 02, 2010, at 5:56 PM, ReySoledad wrote:

    I'll wait for this new technology that's very promising & I will replace the car I'm driving now with all electri cTesla. Maintenence will be much less for this car. Cruising will be very smooth because it;s all electric. Probably much less to maintain being without Internal Combustion Engine, hence no spart plugs, no fuel pump, and the most important no carbon monoxide to emit. Correct me it I'm wrong, but that's what I believed in an all electric car..

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