Tesla (TSLA) has been working on designing and marketing its new car for the last few years mostly using the funds it raised during the IPO. The first electric car of the company after Roadstar, an electric sports car that didn't sell many units, is finally available in the market and this may signify a historical time in the short history of the company. If Tesla's project proves profitable, this may result in great returns for the investors of the company.
The company's CEO Elon Musk sounds very sure that the electric cars will be as widely used and popular as gasoline-cars within 20 years. Of course, in order for this prediction to materialize, electric cars need to become much more affordable, have a much better range and these cars should look much better. Indeed, Tesla's electric cars are stunningly beautiful compared to electric cars designed by other companies; however its price tag is even more stunning.
Tesla's Model S sedan received a lot of positive reviews in the first couple days of its market launch. The car is able to accelerate from 0 to 60 miles very smoothly and it can comfortably seat more than 5 people. Many people who've test driven the car seem to be impressed with the car itself, however this doesn't tell how many of the positive reviewers will actually buy the car, given how expensive it is compared to an average car in the market. If someone is concerned about the gas prices, the chances are high that the same person might not easily afford one of Tesla's Model S cars. Not only electric cars themselves are expensive, but also replacing their parts, particularly their battery can also be very costly for an average American.
So far GM (GM) launched Volt, Nissan launched Leaf and Toyota (TM) launched Prius as their electric cars. GM was able to sell less than 8,000 units of Volt and Nissan's Leaf was a top-seller with less than 10,000 units in 2011. The demand for electric cars might simply not be there. Several other car companies including Ford (F) and BMW are expected to launch electric cars within the next year. Tesla has certain advantages over other electric cars such as good looking cars and longer range, however Tesla's price tag is much higher than competition as well.
Tesla will release 5,000 cars this year and another 20,000 next year. In 2014, the company expects to sell 35,000 units including its upcoming SUV, Model X. The company's profit margins will be very important to determine how profitable the company can be in the next two years. The company's CEO announced that the company could generate positive cash flow by selling 8,000 units. So far, there is demand for 10,000 of these cars, and the demand is expected to increase as more people use these cars and the positive word of mouth spreads. On a negative note, the company was able to sell only 2,500 of its Roadstar model since its launch in 2008, resulting in a net loss of $1 billion. Currently the company's giant factory in California has the capacity to assemble 500,000 cars per year, which tells me that the factory is probably based on highly optimistic demand scenarios. The factory was previously owned by GM and Toyota.
The company received $465 million in loans from the federal government for its efforts to build a car that's environmentally friendly. The government also provides incentives to those that buy electric cars by offering the buyers of these cars $7,500 in tax credits. Additionally, the company received some tax breaks from the state of California as well. The "hand of government" will definitely help the company in the short run, however I don't know if it will be enough. Currently the company has only 14 dealerships and it may be difficult for the company in the short term to sell the number of cars it expects to sell. Another issue exists with the servicing of the cars that might need a fix. With its sports car, Tesla was able to send its highly trained technicians to homes of the car owners to get their cars fixed. Now the company will probably have to hire a lot more of these technicians if it plans to sell many of these cars. This can be very costly for the company. Perhaps, the company could open a few maintenance stations across the country, but that might not be enough. What if 4 people buy a Tesla car in Chicago and another 4 in Detroit; should the company open service centers just for those 4 people in each city, or one service center in the mid-point of two cities? In the second case, one would have to travel at least 2 hours to get their car checked by a qualified mechanic. These issues are not yet addressed by the company.
In conclusion, I have mixed feelings and I am rather skeptical on Tesla in the short term. The company may turn profitable within the next couple years; however the profit might be minimal until there is a much stronger demand for electric cars. Currently the base price of a Model S ranges from $57,000 to $77,000 and adding a "Signature Performance Package" raises the price by another $20,000. At these prices, this car will not motivate those looking to save money on gas. Also, keep in mind that there aren't many charging stations for these cars and Model S doesn't have a back up engine that takes over in case the batteries are depleted unlike GM's Volt. The consumers will continue to be skeptical of these cars for a while, hurting this company's chances of profitability. I am a fan of waiting for a while to see how the company will be performing before investing. At this point, things are too ambiguous for investors to go either short or long with this company. On a side note, the fact that the company was founded and is lead by Elon Musk should provide some comfort to the investors of the company, given his past successes with PayPal.