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Tesla (NASDAQ:TSLA) is one of the very few "green" companies that have managed to show stock price appreciation in the last couple of years. Cleantech companies have been hammered in the equity markets due to a number of adverse factors which are listed below

  1. Chinese overinvestment resulting in price wars in some of the biggest green sectors like wind and solar energy.
  2. Climate Change being put on the backburner by global leaders. There have been no big incentives to fight global warming like a cap and trade scheme or a carbon tax.
  3. The capex heavy and long gestation nature of the cleantech industry compared to the Software/ Internet industry.
  4. Investor and management over enthusiasm leading to global glut in LEDs, solar panels and wind turbines

Many of the top US cleantech companies have gone bankrupt as a result of these macro issues. Some of the prominent failures are A123 Systems, Solyndra, Abound Solar, Beacon Power etc. Even top green companies like First Solar (FSLR) and Vestas have been savaged by this brutal green downturn.

Why Tesla is a Short

1) Burning cash at an unsustainable rate

Tesla is burning cash at an unsustainable rate and has already diluted its equity through a secondary offering after its IPO. The company has had to go to the stock market twice despite receiving a ~$467 million low interest loan from DOE. The company is burning cash at ~$120 million a quarter which makes any delays fatal. The market may not be so accommodative to give it ~$225 million in cash for only a 5% stake. According to Google Finance, TSLA had a negative book value at the end of Q312. If DOE had not eased the loan terms and the market was not in such a Fed induced exuberant state, then TSLA stock would have been worthless by now.

2) Execution Issues

For a small company to survive in a capex intensive industry, execution has to be flawless. They just cannot afford costly delays. However, Tesla has found to be wanting on this front. The company has reduced both its production and revenue targets this year. TSLA will produce 40% less Model S cars in 2012 compared to its 5,000 target. The revenue target has been decreased too as a result of faulty execution. This delay not only leads to increased costs but also reduces customer satisfaction

3) Are EVs really green?

I find it really strange why EVs are considered to be green. If TSLA cars were using green energy to power themselves, then that would be fine. However, most of TSLA's current and future cars would be running on fossil fuel generated electricity. Normal cars are burning gasoline while EV's are burning coal, natural gas.

4) Chicken and Egg Problem

One of the greatest difficulties in adoption of NG vehicles despite their much superior economics is the lack of NG transportation infrastructure. Clean Energy Fuels (NASDAQ:CLNE) is making a big bet on NG by building a national highway of 170 NG fueling stations across America. The success of CLNE is dependent on Westport Innovations (NASDAQ:WPRT) being able to introduce NG truck engines in 2013. Both the companies are symbiotically dependent on each other. TSLA does not have a partner in EV like WPRT. Better Place which was building a business model of charging stations and battery exchange has run into huge problems with the founder Shai Agassi being replaced as CEO. In the absence of a comprehensive EV infrastructure, TSLA cars will remain a novelty item. It is to be noted that Tesla has realized this problem and has established solar power charging stations. Building a complete network of stations will require a massive amount of investment which is beyond the capabilities of Tesla

5) Battery Technology is not good enough yet

The economics, reliability of batteries are just not good enough yet. Also technology and cost improvements for batteries are not happening fast enough. This is a big problem for TSLA which relies on batteries to power its vehicles. It badly needs battery costs to go down so that it can sell into the mass market without government subsidies. The company will not be able to meet its very ambitious revenue numbers by selling $60-$100k cars.

6) Management may not have enough bandwidth

The success of Tesla depends to a large amount on Elon Musk who is the chairman of the company. However, Elon Mush is now the promoter of 3 companies which implies that he has limited bandwidth for Tesla. If you were a TSLA investor, you would want the star promoter to devote his professional time fully to Tesla.

7) Valuation already prices in success

Even the most diehard Tesla optimist would cringe looking at the company's current valuation. The market is already pricing in Tesla's success with a P/B of ~50x and $3.85bb valuation. The company is expected to increase the sales of Model S by almost 7x times to 20,000 and turn profitable for the first time. At $75,000 ASP, that would imply they will do $1.5bb in sales in 2013. This seems a big stretch to me considering that they are having trouble producing 3000 vehicles in 2012. The market does not seem to be factoring in the fact that the production and margin numbers could be much lower. Even if we assume that they will meet all their targets and earn a net margin of 10% (double the industry average), this still implies that they will be trading at almost 25x P/E.

Upside Risks for Tesla

a) Model S and Model X

Winning the Motor Trend car of the year award has established TSLA as a producer of high quality cars and the company has a growing backlog of Model S orders (along with a $5000 interest free unsecured deposit). Model X has also received a lot of good reviews even before its launch. This model which is a built using the Model S platform has wowed reviewers. The company is a seven seater SUV which comes in 2 options (60 KwH and an 85 KwH battery). However, the car will only be launched by 2013 and there is no surety that the timeline will be met. Also there is lot of uncertainty whether the car can meet the promised specs in mass production. Model X like the Model S sedan is priced for the more affluent sections with a price range of $60,000-$100,000.

b) Elon Musk

Elon Musk has managed to launch two of the most well known green companies in recent times -SolarCity (NASDAQ:SCTY) and Tesla. Elon Musk has marketed both of these companies brilliantly which is perhaps one reason why the stock prices of both are so out of sync to reality. Elon Musk has also utilized the US government support for cleantech quite astutely. He has got a massive DOE guaranteed loan for Tesla and Treasury subsidies for SolarCity .

c) Daimler and Toyota as partners

Tesla has important partners in the form of Toyota (NYSE:TM) and Daimler which have taken an equity stake in the company. Toyota has also supported Tesla by providing a defunct auto plant in California in 2010.

Stock Performance

Despite its bad financial performance, TSLA has managed to return ~81% since its IPO and 22% in the last one year. We are quite surprised at how the market is valuing TSLA at $3.96 bb currently. We see no basis for this high price and think that the overvalued stock price is a great opportunity to short the stock. We cannot predict that TSLA will become a penny stock like A123 Systems, but think the risk reward from selling the stock is highly favorable.

Summary

There are things to like about TSLA but the stock valuation is totally out of sync with reality. The automobile industry is a capital intensive, low margin (typical net margins are 2-5%), high volumes industry. Small independent carmakers are a dying breed globally (Aston Martin, Land Rover etc.). The industry is fraught with risks especially for a small upstart like Tesla. Paying such a high valuation for so much risk does not make sense to us at all.

Source: History And Valuation Makes Cash Guzzling Tesla A Short