At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
"May you live in interesting times"
Confucius' old Chinese curse springs to mind on a day like today. Markets had a bit of a hiccup last week, as you may have noticed. But the plus side of market turmoil is that it gives savvy investors a chance to go shopping for bargains. That's just what Merrill Lynch / Bank of America seems to be doing today, as it initiates coverage of Tesla Motors
Likening Tesla to Apple, and Tesla founder Elon Musk to Apple guru Steve Jobs, Merrill argues that Musk is "a technology visionary ... able to manage and create shareholder value." He certainly did that for PayPal shareholders back in July 2002, earning his co-owners a quick 18% one-day profit when eBay bought the company for $1.5 billion. (A deal that hasn't turned out half bad for eBay, either.) Now, Merrill predicts similar riches for early investors in Tesla, inasmuch as:
- Tesla's Model S sedan offers a "uniquely attractive" range between charges -- as much as 300 miles per charge (versus about 100 miles for the all-electric offerings at Ford
and Nissan, and General Motors' (NYSE: F) Volt, which can drive perhaps 35 miles in all-electric mode before its gas engine must kick in.) (NYSE: GM)
- Tesla's proprietary battery technology costs less than what its rivals use.
- Labor costs at its relatively young workforce are also lower.
- And to top it all off, the company's partnership with Panasonic and Toyota
could push costs down even further. (NYSE: TM)
- Finally, Merrill argues that historically, new entrants into an industry win out over legacy participants such as Ford and GM when there's a shift to a new and "disruptive technology."
Merrill believes that electric cars are just such a "disruptor," and predicts their introduction could change the auto industry more in the next 10 years than it's changed in the last 100.
Admittedly, there are risks to the company. Since Tesla is a new entrant into the automotive world, for example, Merrill worries that Tesla lacks experience in mass manufacturing, and may be less able to roll with the punches than its peers, when setbacks arise. Demand for all-electrics is also a question mark -- although General Electric's
Perhaps the biggest question mark of all, though, is Tesla itself -- and its ability to generate the cash it needs to make a go of this new business. The company's not currently profitable, you see, and if you ask most analysts, profitability isn't even in the picture for at least the next couple years. More urgently, though, Tesla is also burning massive amounts of cash as it struggles to bring the Model S to market.
Granted, management tells investors it has funds "sufficient to develop Model S and Model X, based on our current plans." These funds, however, derive from a combination of new share issuances and loans from the Department of Energy. As for Tesla itself, in its most recent report, Tesla admitted that so far this year cash used in (as opposed to generated from) operating activities leapt 38% in comparison to last year's first half. Meanwhile, capital spending at the company more than quadrupled to nearly $75 million. Result: The rate of negative free cash flow at the company more than doubled from $63 million in H1 2010 to $140 million in H1 2011.
Like the Model S or hate it, think Elon's the next Steve Jobs or not, one fact's undeniable: Tesla's not yet on the path to fiscal soundness. It cannot currently fund its operations from internally generated free cash flow, and depends on "the kindness of strangers" to sustain it. All we can hope is that the financial panic sparked by Standard & Poor's downgrade of America doesn't spook Tesla's financial backers before it even gets a chance to enter the race.
The clock's counting down. Will Tesla make it under the wire? Add the stock to your Fool watchlist and find out.