On paper, November was a great month for Silicon Valley upstart automaker Tesla Motors (Nasdaq: TSLA). Its share price, which had been treading water since the company's June IPO, rose more than 50% during the month, from $21.41 on Nov. 1 to $34.33 as of Monday's close.
The catalyst for that rise was the announcement on Nov. 3 of a $30 million investment from Panasonic (NYSE: PC). But is a $30 million investment in Tesla, which has around 93 million shares outstanding, really worth a billion-dollar boost in the company's market cap?
Validation?
Panasonic is the third global giant to put money into the brash-talking electric carmaker, after Mercedes parent Daimler and Toyota (NYSE: TM). But Panasonic's connection to Tesla goes back several years: Among other things, the Japanese tech giant will supply the batteries for Tesla's upcoming make-or-break Model S sedan.
So why the big pop in the share price? Because it gave investors some new reasons for optimism.
The whole problem with Tesla as an investment so far is that it has seemed like a huge gamble on one question: Can this little company in Silicon Valley develop and build a mass-market car from scratch? There have been a lot of reasons for skepticism on that front, ranging from CEO Elon Musk's brash (some would say clueless) dismissal of the abilities of the global auto giants to the simple fact that the company seems to lack the resources -- funds, infrastructure, experience -- to develop a mass-produced car that can profitably compete with the world's leaders on quality and price.
The auto business, in other words, is harder than it looks, and Tesla was showing signs of having bitten off a lot more than it could chew.
Plan B starts to emerge
But now, a new line of business is coming into view. Whatever the company's faults, Tesla's electric powertrains have (for the moment, anyway) the longest range in the business. The company's current model, the Roadster sports car, has a real-world range of more than 200 miles, comparable to that of a conventional gasoline-fueled car. What's more, it's proven -- there are more than a thousand Roadsters out there, so Tesla has lots of real-world experience to work with. That's a big advantage over the new Nissan Leaf's range (roughly 75 miles), and it's the closest thing Tesla has to a disruptive technological advantage over the big guys.
Do you see the opportunity there? Panasonic did.
Tesla has already moved to take advantage of that opportunity, developing and selling battery packs and chargers for an electric version of the tiny Smart Fortwo and Mercedes A-Class. Those parts began shipping in October, with Panasonic battery cells -- and just a couple of weeks ago, Toyota announced it would be working with Tesla on a production version of the Tesla-powered electric version of Toyota's RAV4 SUV, in a deal that will ultimately net Tesla about $60 million if all the deliverables are completed.
But really? A billion dollars?
Details on the electric RAV4s are still sketchy: Among other things, Toyota's being coy about the vehicle's expected range. More than 200 miles in a small sports car costing more than $100,000 may not translate into 200 miles in a $30,000-ish mass-market SUV. Range costs money, as Tesla's own pricing makes clear: While the Model S will start around $57,000 with a "standard" 160-mile range battery, extended-range battery packs (available as options) are expected to push the as-delivered price significantly higher.
Toyota did say that the "Phase Zero" prototype of the Tesla-powered RAV4 is "consistently" achieving a 100-mile range. That's not bad, but it's still well short of what will be necessary to make electric vehicles a real mass-market alternative. And while that's likely to improve as development continues, giants like Ford (NYSE: F) and General Motors (NYSE: GM) as well as big-time suppliers like Johnson Controls (NYSE: JCI) are spending lots of money on refining electric-car technology, and there's no guarantee that the RAV4 (or the Model S) will have a disruptive range advantage when it comes to market.
Given all that, I think this price run-up was, at best, premature. Tesla isn't in danger of running out of money anytime soon, as it has a sizable balance left on its $465 million Department of Energy loan as well as several quarters' worth of cash left in the bank. But the open question is still open: Will Tesla be able to hit the mass market with any significant advantage over the established global giants?
It's a gamble. And at $34 a share, it seems like an awfully expensive one.
Have you added Tesla Motors to your watchlist? It's the easiest way to keep up with all our Foolish coverage of the Silicon Valley upstart.
