In a quiet week, it was a big move: Shares of upstart automaker Tesla Motors (Nasdaq: TSLA) dropped more than 10% on Monday on news that the company's post-IPO "lockup" period had expired, allowing Tesla insiders to sell their shares for the first time.
Tesla's trading around $26 as I write this, a sizeable drop from the $30-$35 range it had been trading in since it popped in mid-November. Is that enough of a drop to make it a buy?
Those pesky fundamentals
Whether you love Tesla or hate it as an investment (and I have mostly leaned to the latter position so far), the company's challenges and opportunities aren't much of a secret. On the one hand, the company has a lot going for it:
- A rock-star CEO. Elon Musk, a PayPal co-founder, is a Silicon Valley Big Deal, and he has plowed a big chunk of his own fortune into Tesla.
- A track record. Tesla's Roadster may be a high-priced niche car that has sold in tiny numbers, but it's the real deal, an all-electric car with great range that's fun to drive and beloved by its owners. And it's a car that passed regulatory muster in markets all over the world -- a huge, expensive achievement and one that adds a lot to Tesla's credibility as an automaker.
- Big-league partners. The barriers to entry in the global auto biz are immense -- but Tesla's partnerships with Mercedes-maker Daimler and giant Toyota (NYSE: TM) give it a legitimate foot in the door, and deals with big-league suppliers like Panasonic (NYSE: PC) add credibility.
- An emerging business as a supplier. Tesla is already selling electric drivetrains to Daimler and working on an electric RAV4 with Toyota. While it lacks the glory of being a world-changing automaker, this is a good, profitable business.
- Money in the bank. Between its IPO proceeds and a U.S. government loan, Tesla should have ample cash to get the Model S to market.
On the other hand, there's a lot to give one pause:
- Hubris. Statements by Musk, among others, leading up to the company's IPO suggested that Tesla's management thought that outsmarting and out-teching the major automakers was going to be easy. But it turns out that the global auto business is brutally competitive -- and years of restructuring have left companies like Ford (NYSE: F) and General Motors (NYSE: GM) with lean, hungry, and talented engineering teams.
- Timing. The supplier business is nice, but Tesla's real hopes ride on the Model S, a sedan due in 2012. Tesla's electric drivetrain has the best range in the business right now, but 2012 is still a long time away. Meanwhile, the major automakers and suppliers are spending billions on electric-car development, and the technology is advancing quickly. Will the Model S still have an edge when it hits the market? It might. But it's likely to be small and under constant threat.
- Competitiveness. There's an issue beyond the technology: The Model S' pricing and features list aim it squarely at offerings from brands like BMW, Audi, and Lexus. That may be the toughest market segment in the whole world to crack -- just ask GM, which is only now getting close with Cadillac after decades of trying, or Honda (NYSE: HMC), which has yet to get its Acura lineup into this territory. Standards of fit and finish here are incredibly high, and buyers are picky, picky, picky. Tesla's Roadster is a fine product, but it was largely designed -- and is largely built -- by outside suppliers. The Model S will be built by Tesla in California. Can this brand-new small-scale manufacturing operation really deliver a product that competes on quality and price with BMW or Mercedes -- or even with Nissan's upcoming all-electric Infiniti?
Long story short, while there's a lot to like about the idea of Tesla, there are some hard-headed reasons to believe that the company's road to a sustainable business may be a rocky one.
But what about the stock?
I have seen nothing to suggest that Tesla will have a decisive, game-changing technological advantage once the Model S comes to market. Without such an advantage, Tesla's best-case scenario is to be just another automaker -- one that lacks the global scale to compete. That sounds like an acquisition scenario to me, and those expecting to receive a dot-com multiple on that buyout are likely to be disappointed. The growth and margins just won't be there.
And meanwhile, the expiration of the lockup period means we're likely to see some ongoing selling pressure in coming weeks, as initial investors seek to diversify a bit and lock in gains after the first of the year. That's not necessarily a bad thing -- but it won't help the stock price in the near term. If you're intrigued by the idea of owning Tesla, even if just to ride the hype bubble for a little while, holding off a bit longer might be a good idea.
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