Tesla May Be Headed for the Junkyard
The year of the electric car was supposed to be 2011. But, while President Obama predicted Americans would be driving a million EVs by 2015, last year they only purchased 20,000. Both the Chevy Volt and Nissan Leaf both undersold projections.
Tesla Motors (NAS: TSLA) , whose Model S is set for a July rollout, is hoping 2012 will be the year. The maker of the Roadster and the highly anticipated Model S has excited investors and EV-drivers alike with its futuristic vehicles; unfortunately, the company's financials have been nothing but a lemon so far.
Founded in 2003, the company has never turned a profit, and currently operates at an unbelievable 111.5% net margin. In nearly nine years, the carmaker has sold just 2,100 vehicles, and the company continues to burn through cash after an IPO in 2010 and a secondary offering last June.
With the Model S expected for delivery this July, 2012 will be a make-or-break year for the cutting edge car company. Let's take a closer look at some of Tesla's numbers to see if this company will ever turn a profit.
2 plus 2 still equals 4
Based on current figures, Tesla is one of the most expensive and least profitable stocks on the market.
As the chart below shows, the EV-maker looks like an even worse investment than any of the much-maligned Web 2.0 IPOs of 2011.
Price-to-Sales Ratio (TTM)
Profit Margin (TTM)
Source: Yahoo! Finance
Of the six other companies listed above, only Linkedin has a higher price-to-sales ratio, and none are nearly as unprofitable as Tesla. Investors gave all seven a one-star CAPS rating, indicating they believe these stocks will all underperform the market.
The S is for suspect
The electric carmaker is going all in with its Model S sedan, allowing production of its Roadster sports car to lapse for now. By the end of 2011, the company had taken 8,000 orders for the car, which starts at a base price of $57,400; it hopes to produce 20,000 in 2013.
Despite these projections, it's hard to see Tesla turning a profit anytime soon. CEO Elon Musk has said that the gross margin of the Model S should be at least 25% in 2013. Assuming the company sells 20,000 vehicles, as hoped, at an average price tag of $65,000 (up from $57,400 for add-ons), the company would bring in revenue of about $1.3 billion from the Model S. With a little extra income from its development services and any Roadster sales, 2013 revenue could clock in at $1.6 billion. The chart below imagines how this might affect the bottom line.
|Item||2011 (first nine months)||2013 (projections)|
|Revenue||$164.9 million||$1.6 billion|
|Cost of Goods Sold||($111.1 million)||(1.2 billion)|
|Gross Profit||$53.8 million||$400 million|
|Operating Expenses||($221.9 million)||($600 million)|
|Operating Profit||($172.9 million)||($200 million)|
Source: Company 10-Q
In what I basically see as a best-case scenario, where the company sells 20,000 of the Model S and operating expenses (R&D and GS&A) only double, Tesla still would be operating at a loss two years from now. While the 2013 operating margin isn't nearly as horrifying as it is now, the volume loss is actually greater.
The continued operating losses are also putting pressure on Tesla's balance sheet. The company has managed to keep its debt under control, currently with $225 million in long-term debt and $268 million in cash, but every quarter of losses means more cash walking out the door. The Q3 figure dropped $62 million from its Q2 level, and if the company can't make a profit for another two years and wishes to pour greater levels into research and development, it will surely need another cash infusion.
A secondary offering in June 2011 raised $233 million, but had no significant effect on the share price, perhaps because CEO Musk purchased nearly 1.4 million shares at the time. Another offering may not be so kind to current shareholders.
Even if Tesla executes its plans perfectly, there are a number of issues outside the company's control that greatly influence electric vehicle sales. A spike in oil prices may create buzz for EVs, but under current gas prices, consumers seem to be happy to continue driving gas vehicles, or are looking at other options, like Zipcar. Furthermore, the production boom in natural gas may be tilting the strategic scales back toward fossil fuels, which means a slower move toward renewable energy.
Another change could come from a Republican administration in the White House, which may have a different attitude toward electric cars. A new president could revoke the $7,500 EV tax credit, and may look askance at Tesla's recent request for another Department of Energy loan, on top of the $465 million it received to develop the Model S. It's likely that even the Obama administration may be wary of sinking more money into renewables in the aftermath of the Solyndra scandal.
Finally, these are luxury vehicles; few, if any, consumers are using them as their only car. Automobiles are notoriously cyclical, and a pullback in the economy could eat into Tesla's already small market.
Foolish bottom line
With its Apple (NAS: AAPL) -style stores that dot the tonier parts of the country, Tesla has made a big bet on its brand. But great brands are usually led by great products, not the other way around. Ten years ago, Apple was far from the tech darling it is today, before its i-ecosystem revolutionized everything from music to computing. Furthermore, Apple competes in the high-margin, mass-market, tech industry against the likes of Microsoft and Google, all three of whom have some of the fattest margins of any publicly traded company.
Tesla bills itself as "a different kind of car company" but they're still making automobiles, just as Ford (NYS: F) and GM (NYS: GM) are. Those two companies may be back from the dead, but at 5.06% and 6.62%, respectively, their profit margins are nothing compared to Apple's 23.95%.
Tesla's mission statement says it was founded "to prove that electric cars could be awesome," but the automaker may want to borrow another play from the tech company it admires. Apple's Lisa and Newton products were considered to be groundbreaking pieces of technology, but both were commercial flops.
As that company learned the hard way, just because you can make something, doesn't mean you should.
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At the time this article was published
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