Wednesday, June 16, 2010

Electric Dream Cars

Tesla Motors received a loan from the government of about $450 million. Based on the number of cars Tesla has sold, the loan equals about $450,000 per car. Meanwhile, the company is unlikely to become profitable anytime soon. Thus, there is no obvious reason for investors to buy this stock in the IPO.

The coming IPO of the new GM will put more pressure on Tesla. GM plans to introduce its Chevy Volt soon. Though the Volt and the Tesla are not head-to-head competitors, they are both electric vehicles with limited range and lengthy battery recharge periods.

Considering there are already some popular hybrids building market share and new electric vehicles arriving in showrooms, there is a high probability of several failures in this segment of the auto industry. The Tesla seems like a reincarnation of the DeLorean or perhaps the earlier Avanti. Both iconic. Both gone.

Tesla Motors: IPO Fueled By Glamour

Tesla Motors Inc. is a company high on glamour. The automaker, which Tuesday scheduled its initial public offering for June 29, makes "green" sports cars that run on electric power. They certainly draw the eye: Walking down Fifth Avenue last summer I met a crowd in suits cooing over one like schoolboys. The cars are not cheap: They start at more than $100,000 each.

Meanwhile company founder and chief executive Elon Musk, age 38, has been in and out of the news. He founded PayPal before selling it to eBay in 2002. He also runs rocket company Space Exploration Technologies and is chairman of solar power business SolarCity. He's engaged to British actress Talulah Riley. Director Jon Favreau recently told Time magazine Elon Musk was among the inspirations for the high-tech entrepreneur played by Robert Downey Jr. in those mindless Iron Man movies.

But as investors have learned the hard way over the years, glamour and excitement are not the same as a sound investment. Indeed the reverse is more often the case.

So should you strap yourself into this zippy little investment vehicle, or stay on the sidewalk?

Let's pop the hood.

The company Tuesday put its likely offer price at $14 to $16 a share. At the $15 mid-point,Tesla would be valued at $1.4 billion. That's quite a price for a company that has only existed for a few years and has never turned a penny of profit.

When the company awarded millions of stock options to Mr. Musk and other insiders as recently as December, it thought the fair price for those was just $6.63. As recently as March, when it awarded yet more options, the fair price was $9.96. Now it's $15. Who said we're in a bear market?

Sales last quarter, at $21 million, showed no gain over the first quarter of 2009–the depths of the financial crisis. Meanwhile operating expenses doubled to $30 million.

So far the company has accumulated $290 million in total losses, on $148 million in sales. It expects net losses at least until 2012.

To date, the company says, customers have driven Roadsters for an aggregate of about 4 million miles. But it also admits there are 1,063 of them on the road. That works out at about 3,800 miles per car. Admittedly most were sold just last year. But this still does not suggest active use.

Anyone betting on Tesla stock is gambling on the success of the forthcoming Model S. But Tesla itself warns that car "is at an early stage of development" and will not be in production until 2012. It adds that it has yet to finalize the design, or complete the engineering, manufacturing or component supply processes for the new car.

And they will not be cheap. The current Roadsters cost over $100,000. Tesla says the Model S, aimed at the "broader market," will cost about $50,000 –even after a $7,500 tax credit.

Even if electric cars take off, Tesla admits it is going to face tough competition. Daimler, Lexus, Audi, Renault, Mitsubishi, Volkswagen, Subaru, Nissan and Ford are all developing electric cars of their own. The company is trying to compete by selling cars online and through its own stores: So far there are only 12.

At $15 a share, the company will raise up to $160 million in the IPO. Toyota will invest another $50 million while Tesla is spending $42 million buying a factory from a Toyota joint venture. Meanwhile insiders are cashing out about $33 million, including $21 million for Mr. Musk. That will still leave him with a stake of about $400 million.

As with most speculative stocks, with Tesla Motors you're taking a gamble. So long as you accept that's what you're doing, have fun.

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