Tesla Motors: 2 Simple Reasons for Passing

Feb.22.11 | About: Tesla Motors (TSLA)

Tesla Motors (NASDAQ:TSLA) sounds like a company straight out of the cartoon The Jetsons. This isn’t the future of tomorrow though but the reality of today. The electric car market is now in its infant stages with Tesla Motors having made it go from being purely theoretical to actually feasible and extremely competitive. Still, the jury remains out on whether Tesla Motors is a good stock to buy. Tesla Motors could grow into a sound and profitable company but that doesn’t necessarily mean that it will turn into a great stock pick. This futuristic car company has yet to address key obstacles it faces and it can’t just keep on kicking issues down the road hoping that they go away. The issues we are concerned with are limited global lithium supplies and extreme competition in the electric car market now. From what we know about Tesla Motors at this point we would pass the on stock until the topics are better addressed.

A Dangerous Dependence on Lithium

Tesla Motors is attempting to rapidly expand into the mainstream electric car market but we have concerns with its dependence on lithium. Lithium is believed to have the second smallest accessible metal supply in the world, which stands right above the “rare earth metals” category. Should Tesla be highly successful and sell thousands of its new Model S in conjunction with other large scale electric car competitors there is a real probability that the price of lithium batteries could sky rocket. Given that this is the most expensive part of an electric car this could destroy a profit margin that Tesla doesn’t even have yet. We think Tesla had it right by targeting a very niche luxury market but by going mainstream this early in the game it has increased its own risk profile unnecessarily. Many industry auto experts see lithium as the “ultimate” limiting variable for the electric car market. As a firm it has failed to address this concern and perhaps rightfully so in that it might not really know what to say about the issue at hand. Tesla Motors may sell thousands of affordable electric cars but unless it has a plan to deal with potential supply constraints that could shoot lithium prices higher this company will be six feet underground before it ever gets off the lot.

Cut Throat Competition

It’s unbelievable how competition has come out of the woodwork for the electric car space with big names like Ford (NYSE:F), Toyota (NYSE:TM), Nissan (OTCPK:NSANY), and more in the line up. Tesla Motors definitely has heat on its tail and we are concerned that the firm may not be able to adequately compete with much more tenured and well-financed auto companies in the mainstream electric car space. We wish it stayed in the niche luxury market space in order to build the brand up more and to get finances in order first. Going head on against auto companies like Toyota is a high stakes game where it’s a “simple do or die” scenario. If Toyota or other major names find the space unprofitable they can leave it and survive but this isn’t the case for Tesla Motors. Further, big auto names can afford to hang out in this space longer and may even attempt to financially bleed out Tesla Motors. The only hope Tesla Motors has in surviving currently against competition is to start running circles around them in terms of sales numbers. Otherwise it may get squashed like a fly if it stops to take a breather.

Conclusion

Tesla Motors is a pass (AKA: (HOLD) at this point. This is one party that we would prefer arriving to in a “fashionably late” manner. If the firm does manage to succeed in the electric car space we have little doubt the stock will likely skyrocket over the long term and allow for ample opportunity to get in down the line when it has proved itself as a financially viable firm.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.