Can Tesla Motors Deliver Electrifying Growth?

| About: Tesla Motors (TSLA)

Tesla Motors' (NASDAQ:TSLA) mission is to accelerate the world's transition to energy-efficient electric vehicles with its high-performance powertrain technology and superior product design. Backed by PayPal co-founder Elon Musk and a host of big-name investors, Tesla was the first company to commercially produce a highway-capable, fully-electric vehicle (EV) and has sold more than 1,000 of its high-priced, high-performance Tesla Roadsters to customers in 22 countries. With access to $465 million in low-interest loans from the US Dept. of Energy, Tesla recently acquired a production facility on the cheap and seeks to leverage its proprietary electric powertrain technology to produce a line of mainstream EVs, starting with the launch of its Model S luxury sedan in 2012. After increasing its proposed deal size by 20% on Monday, the company plans to sell 13.3 million shares at a proposed range of $14-$16. Goldman, Sachs & Co., Morgan Stanley, J.P. Morgan and Deutsche Bank are the lead underwriters on the deal, which is one of five US deals on the IPO calendar for the week of June 28.

Proof of concept

Tesla's two-seat convertible Roadster, introduced in late 2008, is the first and currently only federally-compliant, highway capable EV produced at commercial scale. Powered by a 53 kilowatt-hour lithium ion battery pack, the $109,000 roadster accelerates from 0 to 60 in less than four seconds and has a range of 236 miles on a single charge. Further, the company's proprietary powertrain technology has received a vote of confidence from major auto companies; Daimler (DAI) currently sources electric vehicle components from Tesla and Toyota (NYSE:TM) will invest $50 million in a concurrent private placement. However, the company's financial track record is decidedly less sexy as a result of heavy investments in R&D and limited production volumes: Tesla incurred an operating loss of $61 million on $112 million in LTM sales over the last 12 months.

The road to profitability

Tesla's fortunes are closely tied to the development and rollout of its Model S; a four-door, five-passenger luxury sedan with range options between 160-300 miles and an expected base price of $57,400 before federal tax credits (currently expected to be $7,500). In May 2010, Tesla purchased an existing production facility in Fremont, CA for $42 million and targets initial production of 20,000 units annually, though production could be scaled to an estimated 50,000 vehicles with minimal capital expenditures. The company has already received over 2,000 refundable Model S reservations, despite the fact that deliveries will not begin until 2012. Unlike other auto manufacturers, Tesla sells and services its vehicles directly via a network of 12 major market stores, and management plans to increase its network to 50 stores in coordination with the Model S launch. Looking further down the road, the Model S design will incorporate a modular powertrain platform that Tesla plans to use to roll out a suite of EVs over time, including SUVs, crossovers and cabriolets.

Potential speed bumps

Tesla expects cash burn to accelerate as it approaches the Model S launch, due to investments in R&D, manufacturing capacity and new sales & service locations. The company does not expect to reach operating breakeven until it begins significant deliveries of its new sedan in 2012. From a broader perspective, the commercial viability of electric vehicles will be subject to several factors including quality concerns, availability of subsidies and developments in competing alternative fuel technologies. Nissan (OTCPK:NSANY), BYD Auto (OTCPK:BYDDF), Ford (NYSE:F) and GM all plan to introduce competing plug-in vehicles by the end of 2011 and Tesla may face pressure from other emerging (yet well-funded) EV OEMs such as Fisker, Coda, Wrightspeed and eWolf.


With several shelved offerings and down-priced IPOs in the rearview mirror, Tesla's announcement that it would sell 20% more shares is an encouraging sign for the IPO market. Though the successful launch and record-breaking performance of the Roadster provides proof-of-concept and valuable brand cachet, Tesla faces substantial execution risk as it burns roughly $650 million to get its luxury sedan to production. Nonetheless, the government is supporting the development of the electric vehicle industry via low-interest loans and buyer tax credits, and Tesla will represent the only pure play electric vehicle manufacturer traded on a US exchange. Further, the fact that this early-stage story is generating strong investor interest augurs well for a growing IPO pipeline featuring several tech firms.