Are you ready to plug in your car? Electric car manufacturer, Tesla Motors (Nasdaq: TSLA), is betting on it; and judging by the success of their recent IPO in June, so are investors. The company currently boasts a market capitalization of $1.8 billion which could be questionable considering 2009 sales of $111 million and little to no improvement expected in 2010. Their recent quarterly earnings release did show an increase in top line growth but it also showed an even steeper increase in their net loss.
But who cares about profits when the company can change the world, right? The company has recently been compared to Microsoft (Nasdaq: MSFT) and I can only assume the large market cap is due to investors who don't want to miss, "the next big thing". Looking for the next Microsoft is like searching for the Holy Grail, except most investors aren't Indiana Jones.
Tesla fans love to point out how fancy their showroom is, how great the electric car idea is, and when asked about Tesla's losses will most likely say, "what would you expect?" They also love to point out that, just as with a start-up bio-tech company, you can't place a value on its stock by looking at current earnings or losses. They have a point - to some extent. But unlike most start-up bio-tech companies, Tesla has a product being sold, the Roadster. And since the company isn't profitable with the Roadster investors are pinning their hopes on Tesla's next model, the Model S, due out in 2012. The company used its start-up money to build the car it wanted to but now I'm supposed to wait another two years for "the good one"? The Model S is supposed to be more affordable than the Roadster, available to be mass produced, and is the car that investors think will make this company a success and their investment worth the risk.
Those same Tesla fans, also known as Teslanians, point out that the government is going to increase its support of electric vehicles in the future. They say the subsidies alone will help make electric cars a viable option. This may be true as there is a current plan reported by The Detroit News that is supported by the White House and includes $4.4 billion to support natural-gas and electric vehicles. Unfortunately for the Teslanians, the plan includes $4 billion allocated to natural gas and only $400 million to electric. This plan has not been passed and the allocations could change in the future, but it seems clear which type of car the White House is betting on.
I'm not saying that Tesla has nothing going for it. It does have a $50 million dollar investment from Toyota (NYSE:TM), financing from the U.S. Department of Energy, tax incentives from the California Alternative Energy and Advanced Transportation Financing Authority, and is currently shipping out battery packs to Daimler AG. In fact, Tesla's development services revenue increased from $227 thousand in Q1 of this year to $4.4 million in Q2. This is one of the main reasons the company was able to post a gross profit.
All I'm saying is that you don't have to be the first one to the party in order to have a great time. For example, you could have waited 5 years from the IPO date to invest in Microsoft and you still would have pulled in a healthy 2,160% gainer. Those five years would have let you see how the company was developing its products and you would have noticed Microsoft's operating systems taking over the PC market.
Waiting for Tesla to develop doesn't mean you have to miss out on huge profits and it may even save you from potential losses. After all, the market cap of Tesla already seems to be pricing in a successful 2012 launch of the Model S. The only problem with paying for the Model S now is that the Model S isn't going to be the only electric vehicle on the market. Competition from the likes of Nissan, GM, and Ford (NYSE:F) are sure to take some of the charge out of Tesla's future earnings.
And what about Tesla's current model? With a price tag of over $100,000 some may wonder who is even buying the Roadster. I wondered this myself and Tesla gave me a good answer in their prospectus which reads, "Additionally, to date some of our Tesla Roadster sales have been made to persons who had pre-existing relationships with our management team or who are affluent individuals with a strong interest in owning a novel product".
Novelty or not, if I start to see Tesla's passing me on the freeway or the Tesla battery as a battery of choice in other electric vehicles then I'll think about taking a ride. But right now the scenario reminds me of the rise and fall of most ethanol companies. An example is Pacific Ethanol (Nasdaq: PEIX). Pacific Ethanol's stock rose to over $30 per share during 2007 and now sits at around $0.50 per share. Investors in Pacific Ethanol stock, and the entire ethanol industry, were banking on an all ethanol society. Sales did increase for this company but, just like Tesla, so did its losses. The highest price per sales ratio Pacific Ethanol had was 3.1. As a comparison, using an estimated 2010 revenue, Tesla would have a current price to sales of 12.
Then again, who cares about valuations when the company can change the world, right? Teslanians don't.
Disclosure: No position in stocks mentioned