Tesla (NASDAQ:TSLA) makes a very unique product; however, I think there are a number of challenges facing the company which are likely to make investing in Tesla shares a poor choice in the long term.
As a relatively new automaker, Tesla faces execution risks, quality control risks, market/consumer acceptance risks, and financial risks. Investors should be asking themselves what happens if Tesla can't deliver the new S model on time, what if a Tesla model faces similar recall issues Toyota (NYSE:TM) has had recently, what if consumer interest is inadequate to meet sales goals, and how long can the company continue without generating any profit?
There are large dealerships across the U.S. that sell more vehicles in a single year than Tesla has sold since inception. There might not be enough consumer demand to support an automaker (much less a dealership) with such a limited electric vehicle product line. It's also worth pointing out that while electric cars have zero emissions, that is only because the emissions/environmental impact of the electric power is happening at the time the electricity is generated. Much of the electricity is generated in the U.S. by burning coal, and other methods which clearly are not zero-emissions or environmentally friendly.
Hope and hype won't fuel Tesla shares forever. Tesla recently reported a quarterly loss of about $50 million and revenues of about $36 million. When you have a company losing more money than it has in revenues, something is going to have to change pretty fast. I won't be surprised if Tesla offers more shares in order to raise capital in the coming months.
Do you know anyone who currently owns or plans to buy a Tesla? I don't, and I live in a very affluent area. Tesla appears to have about 3,700 "reservations" for the model S, but when you look at the terms on this "reservation," they do not lock in pricing, a production slot or an estimated delivery date. The document also says that the $5,000 deposit paid to make a reservation is fully refundable. So how many of these people will actually move forward with a purchase, and how many are going to think twice before buying the first model year of a sedan from this young company and request a full refund on their deposit? In my opinion, these reservation agreements mean very little to either Tesla or the potential buyer at this time, as they show almost no commitment by either party to making a deal.
The model S is supposed to be on track for delivery in mid-2012. But what happens if this is delayed? I would not be surprised if unexpected problems and delays come up just as they frequently do with anything from a kitchen remodel to the delivery of Boeing's (NYSE:BA) new Dreamliner model. If a company with the experience, engineering and financial resources of Boeing can run into major delays in delivering a new model, I believe Tesla can too.
No car maker in recent history has ever lasted for long with just two models, and I know of none that have made it based solely on electric vehicles. Just imagine what would happen if Ford (NYSE:F), GM or Nissan (OTCPK:NSANY) only had one or two models ... and their entire two-model lineup was based solely on electric power.
I think too many investors are in Tesla shares for the cool factor and ego, rather than return on investment. If you can't afford a Tesla Roadster, you can still buy a few shares of stock and live the dream, right? Nobody probably wants to tell people at a cocktail party that they own shares of Penske Automotive Group (NYSE:PAG) when they could say Tesla instead. PAG owns many premium car dealerships throughout the U.S. PAG's annual revenues are over $10 billion and its market cap is about $1.9 billion, versus Tesla's market cap of about $2.3 billion.
Tesla's recent quarterly revenues were about $36 million and PAG's were $2.8 billion. PAG is making millions in profits, and TSLA is losing many millions in a quarter. What that tells me is that Tesla investors will need to see absolutely incredible revenue and profit growth for many years for it to be able to grow into the over $2 billion market value it currently has.
In my opinion, Tesla cars are a novelty; based on its current plans, I don't see why Tesla shares won't end up as a novelty like many other dream car concepts from Delorean to Tucker. If you want to make an investment in electric cars or the auto sector, shares of PAG, Ford or GM are far less risky in my opinion. That being said, if anyone can pull this off it just might be Tesla CEO Elon Musk -- but I will watch this company from the sidelines.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.