If you'll allow me, I'd like to begin my latest article with a disclaimer. This article is not intended to be political in nature. The very subject of the piece lends itself to controversy and as you know, when controversy shows up, its kissin' cousin politics, isn't far behind. If I've allowed politics to wedge its big foot in this article's door and thus impose itself on you, I apologize. I assure you, that wasn't my intent. There, that's enough, let's move on.
The Tesla Motors (TSLA) Model S is a beautiful automobile. Anyone possessing even a molecule of appreciation for elegance would find it hard to resist the S's subtle confluence of lines and contours. Apparently, a lot of investors are also having trouble resisting Tesla's stock. It's my opinion that these investors are going to have a collision with reality. But first, let's learn a little about this engineering marvel.
Aluminum is the medium used in sculpting the beauty of the Model S. The AC motor is liquid cooled, nestles in the rear of the automobile and generates 362 horsepower. If that's not angry enough for you, a few more dollars will buy you a motor with a few more windings that puts out 416 horsepower. The acceleration of the Model S is said to be neck-snapping and the handling taut and responsive. Top speed? 130 mph. The battery, all 7,000 cells and 1,000 pounds of it, lies beneath the floor boards. The battery's position provides a low center of gravity for the 4,600 pound automobile, which in turn makes for some great cornering characteristics. Driving range is around 300 miles for the Model S equipped with the largest battery. The interior, and especially the dash board, is right out of Star Trek. The car has 5 doors and can carry 7 people. The Model S has its failings, but as a lovely woman's beauty blinds an admirer to her faults, so too does the Model S mask its imperfections. The price tag to have this seductress awaiting you in your garage is between $70,000 and $106,000. This high price notwithstanding, the purchase of a Tesla Model S could possibly be a wise investment. The purchase of Tesla stock is quite another story.
Trading at over $43 a share, TSLA's market cap is $5 billion plus. That's twice the market cap of Wendy's (WEN) and Allscripts (MDRX), and over three times that of the New York Times (NYT). These are just a few of the companies whose market cap is dwarfed by Tesla's. Companies, I might add, who incorporate a viable business plan to produce products and profits. Being the astute investor you are, I'm willing to bet that the word viable from the previous sentence leapt to your attention. Tesla investors are ignoring that adjective at their own peril. And though for the first time in its brief history as a public company TSLA is expecting to report a profit, there is no connection between its current share price and economic reality. The stock market anticipates, it discounts the future and for the most part does an adequate job of it. There are times, however, when rational expectation deteriorates into irrational speculation. In my humble opinion, this is one of those times.
All of us are familiar with the term "economy of scale." We know how important it is in the success of any manufacturer. In Tesla's case, it's the company's internal economy of scale that is paramount to its success. Tesla has reported that it expects to deliver 20,000 cars this year. That's commendable. Ford Motor Company (F) is capable of making 20,000 cars in less than two days. That's economy of scale. To be fair, shortly before its IPO in 2010, TSLA received a $50 million shot in the arm from Toyota (TM). With Toyota as an investor, and with the two manufacturers teaming up to develop a prototype that runs on Tesla's powertrain, Toyota's role could expand from Tesla investor to Tesla mentor. I can think of no better teacher in the study of economic scale than TM. Also, earlier in 2009, Daimler (OTCPK:DDAIF) acquired nearly 10% of Tesla in a deal worth tens of millions.
Let's talk for a moment about the very heart of the Model S, its lithium-ion battery pack. At the risk of sounding alarmist, this is the same technology that caused the grounding of Boeing's much heralded Dreamliner. A recent press release from Reuters, reports that a growing number of engineers are questioning the viability (there's that word again) of this technology and its widespread adoption in the transportation industry. Some experts say that another ten years of research is needed before the lithium-ion pack is deemed practicable. Others state that an entirely different form of technology is needed that will answer the concerns of safety and cost. Curiously, one of the most conspicuous of the lithium-ion doubters is Toyota. One paragraph of the release has Tesla proclaiming its unshakable faith in the lithium-ion battery pack concept. A few paragraphs later, one can read about Toyota putting together a special research team to explore other options to the 154-year-old technology. This dichotomy, though striking, probably signifies nothing. Still, it raises doubts as to commitment and direction in what is easily the most important segment of electric vehicle development.
The main reason a person buys an electric car is to thumb his nose at the gas station as he drives by. Some other electric vehicle drivers might use another digit of their hand in an entirely different manner, but we won't get into that. To a few of these folks, the cost of the vehicle is of no concern. Their principles have no price tag. Good for them. For the rest, however, the subject of savings plays an essential role in their decision. The Tesla Model S isn't cheap, and no matter how good it feels to give oil companies the old heave-ho, a practical person has to take into account cost effectiveness.
According to an April 17 Wall Street Journal article on ethanol, this nation's craving for gasoline peaked in 2007. Since then, a slowing economy and cars getting better mileage have dampened demand. As the price of gasoline drops, it takes with it the incentive to purchase a Model S, or any other electric vehicle for that matter. And contrary to what the conspiracy crowd and the oil company haters might think or say, the law of supply and demand has not been repealed. Soft demand leads to lower prices.
Financial pundits from every nook and cranny of media warn us to get used to the new reality of slow growth and chronically high unemployment. In short, they're saying we're not the country we used to be.
Ironically, one of the few bright spots in the employment landscape is the oil industry. Shale oil and new pipelines come to mind.
Why then, when faced with conditions that are conducive to falling gasoline prices, would a consumer fork over $70,000 for a Tesla Model S, when for half that price he could buy a clean burning internal combustion model that gets 35 to 40 mpg?
Why, indeed. The answer to that question is what convinces me that Tesla Motors is a business in name only. If Toyota and Daimler chose to invest millions in TSLA, that's their business, after all it's their money. The same can be said for investors who choose to hoist the share price of Tesla to breathtaking heights. If TSLA's founder, Elon Musk, wants to use his billions to make his dream a reality, more power to him. That's the kind of grit that built this country.
However, when government tax credits are used to chaperone an enterprise that couldn't survive otherwise on the mean streets of corporate America, it becomes our business for obvious reasons. When a company in one breath proclaims that it will pay off a $465 million loan of taxpayer money early, and then states in the next breath that its sales of Zero-Emission Vehicle credits leapt from $2 million to $40 million, it becomes our business. When states across the country are offering not only tax credits but lots of other goodies as incentives to purchase an electric vehicle, it becomes the business of the residents of those states.
All that's being accomplished with all this government largesse is the creation of a false market. The chief of staff for Pennsylvania state Rep. Tony Payton, one Jorge Santana, said as much in 2011 with these words. "You want to create a market that's conducive to the marketplace." To the consumer the vehicle, Tesla Model S or otherwise, becomes at best a prize, at worst, an afterthought.
If Tesla survives, it will be because of the good graces of such benefactors as Toyota and Daimler. Taxpayers both federal and state shouldn't become prominent entries on Tesla's cash flow statement.
If you'll recall, I mentioned earlier in the article that the Model S might prove to be a wise investment; a wise investment as a collector's item. I mean no sarcasm when I say that.
I began working on this article two days ago. At that time, TSLA shares were going for around $43 and change. Today, Thursday, they closed at over $47. To all Tesla shareholders present and future: Caveat Emptor.
And by the way, before I forget, if Tesla Motors the electric vehicle company had the same results as Tesla the broker of Zero Emission Vehicle credits, I wouldn't have an article.
If Seeking Alpha chooses to publish this article, and you as a reader choose to respond, please remember my opening statement.