[This article has been updated to reflect a correction in paragraph 6.]
Electric car maker Tesla Motors Inc. (TSLA) has yet to earn a profit, has yet to mass produce a vehicle and is currently trading at about 20 times sales, but it could be time to start a position in this exciting young company. This week's earnings report showed revenue for the most recent quarter increased by 95% year-over-year, even as the loss widened to $0.47/share. The company projected 2011 revenue of $160 to $175 million, a 40%-50% increase over the current year and better than analyst estimates.
Losing Money to Build the Future
The larger loss in the most recent quarter is mainly due to building out production facilities for future models along with increased research and development spending. In 2012 Tesla is expected to begin mass production (starting at 20k units) of the new model S Sedan, a slightly more affordable (58K) car aimed at middle and upper-middle class customers. Alpha versions of the vehicle have already been hitting the roads and the car is expected to be available for purchase in mid 2012. Production of the current Roadster model will continue. The Roadster retails for about 110K, serving the high end of the market.
Becoming a major auto manufacturer takes a big investment of time and money, so Tesla has entered into a partnership with Toyota (TM) to work together to produce the new line of electric vehicles. This should benefit both companies as they get to learn from each other's expertise and create economies of scale. As part of the arrangement Toyota has invested 50 million in Tesla. Daimler AG also owns an 8% stake in Tesla.
By 2015 Tesla plans to have an all electric car available for under $30K and a model X SUV available in the same price range. Bringing an all-electric car into the mass market price range could be a big win for Tesla but in the meantime, the losses continue to pile up, even as revenue growth accelerates. Investors will have to be patient as they wait to see if promises of a better 2012 come to fruition, but for those with a longer time horizon an investment in Tesla could prove to be rewarding.
Shares of TSLA are currently trading at about $24, down substantially from a price of $35 reached in late 2010. Technically there appears to be solid support from buyers above $20 a share so downside could be limited at this point. Let's take a look at the fundamental story and valuation.
With up and coming companies I like to see a meaningful amount of insider ownership which guarantees that management will be firmly aligned with shareholder interests. Tesla passes this test. Founder Elon Musk remains the visionary behind the company and owns about 29% of Tesla. Institutional ownership stands at about 30%. I find it reassuring that Toyota has become a major partner.
Tesla sports a market cap of about $2.24 billion and 2010 revenues of $116 million. The company has about $96 million in cash and $57 million in debt, according to Yahoo Finance. Short interest is high at about 16%.
As the company continues to lose money, its profit margins, return on equity, return on assets and cash flows are all in negative territory, making shares of TSLA a speculative play.
Risks: While Tesla is currently losing money it is also projected to need further financing to build out its production facilities for future vehicle models. This could lead to a secondary offering of shares, diluting current shareholders. There is also the chance of new(er) technologies disrupting the auto industry. Another risk is that government subsidies could be eliminated in future budgets. The U.S. government is currently helping a few select cities to build out electric car charging infrastructure and President Obama seems committed to supporting the EV industry, proposing a $7,500 rebate for EV purchases. Relying on government subsidies adds to the risk of investing in Tesla. Competition from GM (GM), Ford (F) and Nissan (NSANY.PK), among others could prove to significant but Tesla seems to have a strong brand and good expertise going in its favor.
Environmental Impact: While electric cars will surely be a net positive for the environment due to the substantial reduction of emissions such as CO2 there is a concern about the batteries, specifically the amount of pollution associated with producing and disposing of them. On the plus side, Tesla's cars promise to reduce noise and air pollution compared to traditional internal combustion engines. Even with the negative impact of battery pollution, Tesla can surely be considered a "green" investment and could also earn shareholders a lot of green over the coming years if the company is able to execute and starts hitting on all cylinders.
Personally, I'm watching the company but not holding any shares. I'd like to see Tesla get closer to earning a profit before buying in but with that said, I don't see too much downside to shares at this point. If the story continues to play out in a favorable fashion I may buy into Tesla later in 2011, if the price is right.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.