Growth investors revel in searching for the next big thing. In tandem with their pursuit of the potential home run returns, many also enjoy feeling as if they helped usher in changes into the way people lead their lives. While admirable, trying to realize tomorrow today can expose your investment dollars to the risks inherent in trying to predict the future. In my mind, it's easy to recognize a broad trend and vastly more difficult to pick the one or two companies likely to drive those changes.
Case in point, electric vehicle manufacturer Tesla Motors (NYSE: TSLA ) strikes me as a prime example of a classic growth company: a company with game-changing potential trying to popularize a, in many ways, still-nascent technology. And while it has a number of legitimate positives benefitting it, it also isn't the clear-cut winner in the battle to popularize the electric car.
The good
Tesla gets a bad rap in some ways. In measuring its achievements, you can argue Tesla has contributed more than any other operation (especially considering its relative size) into making the electric car a viable member of the automotive community. Tesla developed a legitimate, all-electric sports car (sub 4 second 0-60 mph) that uses zero fossil fuels to get speed freaks' adrenaline pumping. And while this clearly caters to a very limited market, the R&D and innovation needed to get even to that point deserves recognition.
In fact, Tesla seems reasonably on track with its long-term strategic plan, according to co-founder and CEO Elon Musk. According to Musk, Tesla was founded with the intent to develop an EV sports car (see: Tesla Roadster) that could pave the way for several rounds of continually more affordable, mass-market EVs. Whether investors like it, Tesla seems to still be on this path with its cheaper Model S coup due for release within the next 12 months.
The bad
Despite largely executing its strategy to this point, Tesla's downfall might come from what it still has yet to accomplish, rather than its past successes. Its growing trend of unprofitability and the likelihood that losses should continue into at least the medium term illustrate the massive challenges the company faces. Although one can't expect quick profitability to follow an ambitious undertaking like commercializing all-electric vehicles, the growing divergence between revenue and profit certainly are concerning. Tesla grew its top line from essentially nothing in 2007 to $116 million, while its losses during that time ballooned from -$78.2 million in '07 to -$154.3 million in '10. Worse yet, the company announced it plans to halt sales of its Roadster model in the next two months, while it concentrates on the development and launch of its Model S scheduled for some time in 2012. This kills a key revenue source at a time where growing its top line remains the only financial success the company has ever enjoyed. Ultimately, investors buy into companies intending to profit. While Tesla investors understand the long-term nature of the company's profit potential, investors' patience can only last so long.
And the ugly
Worse yet, Tesla's first-mover advantage will likely erode as higher gas prices incentivize major manufacturers to meet consumer preferences for more fuel efficient cars. Within the last year, both Nissan and General Motors (NYSE: GM ) subsidiary Chevrolet launch all-electric autos as well (the Leaf and Volt, respectively). Toyota (NYSE: TM ) announced plans to release an all-electric RAV4, with Tesla's assistance. The larger auto manufacturers have vastly deeper pockets than Tesla and economies of scale on their side. Tesla is running out of open road as it tries to work toward its stated goal of producing an EV that appeals to a wider audience.
Foolish takeaway
Bottom line, commercializing a game-changing technology takes a lot of time and upfront investment. While long-term trends in the auto arena should favor Tesla, it still has a long way to go. If it can approach profitability with Model S, it stands a chance -- a big "if" in this case. The company to make the first concerted push into a new field typically isn't the one remembered in the history books. With the odds stacked so steeply against Tesla, investors might do better to avoid this potential game-changer for the time being.
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