Three Reasons It May Take Tesla Years to Climb Higher

 |  Includes: F, TSLA
by: Cabot

By Timothy Lutts

While Thomas Edison is arguably the best-known American inventor, a cult following has grown up around Nikola Tesla, the Serbian engineer whose skills as an inventor, perhaps superior to Edison’s, were undermined by his inferior business sense.

And this cult may have reached its peak on June 29, when the electric car company named Tesla Motors (NASDAQ:TSLA) came public, raising $226 million from investors large and small who see great profit potential in the business.

I say may because there’s a possibility that it will be years before this stock closes higher than it did on its very first day of trading.

And I say this because of three basic facts.

First, while every other automobile company on the planet has a market capitalization of less than one year’s revenues—they range from 33% of revenues for Ford (NYSE:F) to 59% of revenues for Honda (NYSE:HMC) - Tesla’s market capitalization is now more than $1.9 billion, which is more than 17 times revenues. In other words, TSLA is 38 times as expensive as the average automotive stock.

Two, while the company has posted cumulative revenues of $148 million by selling 1,063 two-seat electric sports cars (currently priced at $109,000) to customers in 22 countries, it has yet to make a profit, and it has no proprietary technology that can prevent other companies from competing, especially in higher-volume lower-price mass markets. In fact, it now looks like there will be a substantial time gap (and thus a revenue gap) between its two-seat Roadster and its four-door Model S (priced at $56,500) - promised for delivery in 2012; driving into this gap will be the Chevy Volt, the Nissan (OTCPK:NSANY) Leaf and others.

Three, and most important, the stock’s chart isn’t going up, which tells me that the public’s appetite for the stock has been satisfied for now.

Now, I hope I’m wrong. I admire Tesla’s Roadster, impractical though it is for my lifestyle. I’ve toyed with the idea of reserving a Model S. And I do expect to see some Teslas on the road in the years ahead.

After all, there’s already serious money behind the company. Elon Musk, the founder of PayPal, is a major investor as well as the company’s CEO; he’s in for about $75 million. Also on board are Google (NASDAQ:GOOG) co-founders Sergey Brin & Larry Page, former eBay (NASDAQ:EBAY) President Jeff Skoll, Hyatt (NYSE:H) heir Nick Pritzker, Daimler AG (DAI), Abu Dhabi’s Aabar Investments, numerous venture capital firms, and the United States Department of Energy, with $465 million from its Advanced Technology Vehicles Manufacturing Loan Program.

Also, management’s decision to launch with a high-priced niche product—the same model used by the electronics industry—and then grow by driving costs down and targeting larger markets—has proven smart. Hopefully, they’ll make many more smart choices in the years to come.

But it’s important to remember that the stock is not the company. Even if the company does well, the stock may not.

The ideal investment, in my book, is an unheralded company whose products are in increasing demand, whose profit margins are large, and whose public perception grows as its business succeeds.

The risks of investing in Tesla today are that the company is already well-known, and well-thought-of, thanks to its A-list connections, and that increasing competition may make the road ahead bumpier than anticipated.

If I had to invest in a car company, I’d invest in the one with the strongest chart. That’s Ford, which broke out to recent highs on Thursday and Friday (2 weeks ago) after a great earnings report and is the cheapest of the bunch.

Disclosure: None.