Recent Tesla (TSLA) stock analysis has been like a schizophrenia swinging between titles such as "History And Valuation Makes Cash Guzzling Tesla A Short" and "Buy This Apple of the Auto Industry". There is no shortage of strong opinions on both sides. The stock itself has lately been an enigma. While 49% of the outstanding shares are shorted, the share price has appreciated 20% in the last two months. If you feel torn on this one, you have plenty of company. Will Tesla succeed? There is no simple answer. I have collected 15 common arguments from both sides and listed them below in no particular order. I will give you my brief comments. You will be the judge.
Tesla will fail because …
Tesla will succeed because …
Tesla has been burning cash fast at a unsustainable rate
Tesla has delivered 4K cars and has 20K reservations on the book worldwide
Tesla can make expensive mistakes
Tesla software can be updated in the field over internet
Tesla had production issues
Tesla is already making 400 Model S a week
EV is not really green
EV is green
Battery technology is expensive and immature
Battery technology is improving and getting cheaper
Elon Musk is over stretched
Elon Musk is a genius
The stock is valued too high
The stock will grow
Auto company is capital intensive
Tesla is using 20% of their Fremont production site, they can scale
Tesla model S interior finish is not luxury
No model S owner complained about the finish quality
Tesla cannot compete with the big boys
Tesla has a rich patent portfolio
EV imposes range anxiety
Model S solved the range problem
Other EV and plug-in (Volt, Leaf) are not that successful, why should Tesla?
Tesla Model S is free of the usual EV compromises
Tesla has not been profitable
Elon Musk twitted Tesla was cash positive as of the third week of November 2012
Fuel cell technology can derail battery as the energy source for cars
Fuel cell's theoretical efficiency limit is 20%-30%, battery engine is >90%
Tesla is a one car company
Model X is in development and to be delivered at end of 2013, other developments are on-going
Tesla has been burning cash fast at an unsustainable rate.
Tesla has delivered 4K cars and has 20K reservations still on the book worldwide.
Producing cars is not cheap. Making luxury cars like Model S bleeds even faster. In three months from June 30, 2012 to September 30, 2012, Tesla's cash position went from $210M to $85M. Net loss swelled from $105M to $110M. However, Tesla delivered about 4000 Model Ss in the second half of last year with the most delivered near the end of the year. Their CEO Elon Musk commented about positive cash flow in the third week of November. They have another 20,000 reservations on the book to be delivered. If Tesla does it right, the bleeding may have already stopped.
Tesla can make expensive mistakes.
Tesla software can be updated in the field over the internet.
A costly recall can literally kill Tesla at this stage. Tesla has been extremely careful to ensure quality even at the expense of production delay. I am sure they are aware of the lethal effect of a mass recall. It is especially nerve wracking as more vehicles are being delivered and "tested" on the road. If it is were software mistake such as engine control, it could be patched through the built-in internet connection on the Model S. If it were a hardware mistake, sky would be the limit.
Tesla had production issues.
Tesla is already making 400 Model Ss a week.
Yes, Tesla had some supplier issues which delayed the Model S delivery last year. But the issues are said to have been resolved. Tesla is already producing 400 Model Ss a week. However, Tesla recently irritated some of their reservation holders by skipping over those with smaller battery capacity configurations in favor of the more expensive model. They need to work on that.
EV is not really green.
EV is green.
Some people said electric vehicles are not really green because the electricity is still generated by burning fossil fuel. True. But electrical motors are over 90% efficient. The electricity transmission loss is small. Electricity is currently generated from coal, petroleum, natural gas, hydro power, nuclear power, wind and solar power. The mix of sources is different from state to state. In California, EV's carbon footprint is 25% of traditional gasoline cars of comparable size and weight. In Vermont, EV's carbon footprint is only 2% of gasoline cars because most of the power is generated from nuclear energy there.
Battery technology is expensive and immature.
Battery technology is improving and getting cheaper.
Battery costs about one third of the total vehicle cost now. It is expensive. However, battery cost has been declining at a rate of halving the cost every ten years in the past several decades. I don't know if the decline rate will accelerate or plateauing. But the cost is very likely to continue to decline as usage goes up. Lithium, the raw material for lithium ion battery, is widely spread in earth's crust. The concentration is generally low, which is the reason it is called rare earth. But it is the 25th most common element. Chili is currently the biggest producer among many other countries. The raw material of the battery is not in danger. In terms of technology readiness, Tesla sources from the best battery supplier Panasonic. Panasonic is the sole battery supplier for Apple too. This fact tells you something about the quality of the battery. Tesla offers 800K-mile warranty on their battery pack. Battery technology is still improving. But one can argue it is good enough at this point.
Elon Musk is over-stretched.
Elon Musk is a genius.
Some pointed out Elon Musk, Tesla's CEO, is running three companies: Tesla, SpaceX and SolarCity. He must be distracted. I don't claim to know how he runs the companies and the extent of his involvements. But who sets the limits on how many companies a person can run. Doesn't the president run the whole country?
The stock is valued too high.
The stock will grow.
There are plenty of number crunchers arguing the value of this stock. I won't bore you with repetitions. Don't forget this is still a startup; it is not a cash-flow company. The growth factor is very hard to evaluate. The fact is Tesla's 2013 production capacity is pretty much booked. You have to consider beyond 2013. Some points below may help you.
Auto company is capital intensive.
Tesla is using 20% of their Fremont production site, they can scale.
Being capital intensive is not necessarily a bad thing. The implied argument is you can't afford to make mistakes in the business. No question about that. Tesla acquired their 5.5 million square foot Fremont factory with equipment from GM and Toyota for penny on the dollar when the "big boys" were in a hurry to get out. Tesla cancelled their plan to build a new factory in Albuquerque, New Mexico and grabbed this deal. At this moment, Tesla is utilizing about 20% of the floor space. One can argue the big expenses are somewhat done. The factory allows Tesla to grow enough to double the stock price before another big factory is needed. (That factory used to produce 6000 GM/Toyota vehicles a week to give you a reference.) On the other hand, R&D is still expensive and on-going. Nothing comes free.
Tesla Model S interior finish is not luxurious.
No Model S owner complained about the finish quality.
Yes, the interior finish of Model S is kind of Spartan and different. It may not fit the bill of luxury in a traditional sense. The 17-inch touch screen is definitely different from the "luxury" knobs and buttons. Luxury can be a matter of taste. I have not seen complaints from Model S owners about the finish quality yet. I guess you have to see one in your nearby Tesla showroom to have a good feel.
Tesla cannot compete with the "big boys."
Tesla has a rich patent portfolio.
Some said there is an insurmountable barrier to enter the auto industry. It has been there for 100 years. This is assuming you play the same game with the same rules. If being big and mature makes an industry impervious, Intel, Apple, Microsoft and Wholefood would not have succeeded. The trick is disrupting the existing industry with new thinking and innovative products. Easy? Of course not. That's why there are a lot of arguments about weather Tesla is truly innovative. Just look at the big autos offering all kinds of incentives to move their inventories. Tesla offers no incentive and the waiting list is a year long. Don't forget Tesla secured hundreds of patents on EV technology. It will be costly or time consuming for the "big boys" to reinvent the wheel.
EV imposes range anxiety.
Model S solved the range problem.
The range anxiety means two things. One is the range per charge is short. You can't go very far. The other is once you run out of battery, it is hard to find a place to recharge, and charging takes a long time. It still takes 30 to 40 minutes to fully charge the Model S even with the super charger. Household 220V will take you 2 to 3 hours. The common 110V outlet will double the charging time yet again. The 10-minute gas fill-up time and the omnipresent gas stations are still clear advantages for gas cars. While Tesla cannot change the law of physics, they did make the range far enough to cover up to 160 to 300 miles per charge depending on the configuration. It is a big improvement over the ~ 80 mile range on the Nissan Leaf. The households who can afford a Model S most likely have another gas car for really long road trips. The charging situation is not perfect. But one can argue it is good enough to stimulate enough demand.
Other EV and plug-in (Volt, Leaf) are not that successful, why should Tesla?
Tesla Model S is free of the usual EV compromises.
This is like saying doughnuts are not successful in my town, so bagels must fail too. You have to look a bit closer. Chevy's Volt, Nissan's Leaf suck on performance, range, size, aesthetic appeal and price. Tesla's Model S outperforms all other cars at comparable price point including all the gas cars. Its design is attractive, range is unique among EV's, and offers plenty for the price. The customer base for Tesla is smaller than the other cheaper EV's because of the price premium. One can argue if Tesla can attract enough customers in the luxury car market. The US luxury car market alone is 1 million units a year. Tesla's current plan of 20,000 to 30,000 units a year is not that impossible.
Tesla has not been profitable.
Elon Musk tweeted that Tesla was cash positive as of the third week of November 2012.
Tesla has not been profitable for the last five years. What make you believe it can sustain profitability any time soon? There is no illusion that Tesla will stop spending like a startup any time soon. Elon Musk tweeted Tesla was cash positive as of the third week of November 2012. We don't know by how much or if it is sustainable. All signs say Tesla has no problem on demand. The question is can Tesla make enough profits to sustain the company? I haven't seen enough evidence one way or the other. The 2012 fourth quarter report due soon will offer more clues.
Fuel cell technology can derail battery as the energy source for cars.
Fuel cell's theoretical efficiency limit is 20%-30%, battery engine is >90%.
Hey, what about fuel cell? Haven't we seen cars run on fuel cell's on TV? Fuel cell's run on hydrogen. Hydrogen is mostly extracted from fossil fuel today. The green way to produce hydrogen is electrolysis of water. This means you have to generate electricity first. Then you have to liquefy gas hydrogen into liquid hydrogen, which consumes enormous amount of energy. Assuming you solve all the storage, transportation and distribution problems, the efficiency of fuel cell is only 40%-60% in converting hydrogen to electricity. The aggregate efficiency of fuel cell is around 20%. This is death sentence to fuel cell. Enough said.
Tesla is a one car company.
Model X is in development and to be delivered end of 2013, other developments are ongoing.
Model S is the only one car that Tesla is selling. This means Model S must succeed. Otherwise, forget about Model X and follow-ons. This brings us back to the question - Can Model S succeed? Expensive recall, production delay, profitability, declining demand beyond EV enthusiasts are some of the risk factors along the way. You can point out the risks and be right. However, nothing suggests Tesla's failure is eminent. If Tesla truly has an innovative product and the company is run well, there is no reason it cannot succeed. Buy, short, stay away? Your call.
Disclosure: I am long TSLA.