Tesla Motors Inc., (TSLA) is about to launch the Model S sedan. The company has secured a number of advance orders for this electric vehicle and the stock price has been rising, fueled by the anticipation of a strong launch. However, some investors might be putting the cart before the horse, because while this might seem like a very exciting time to be a Tesla investor, it might not be for long. The situation reminds me of what happened with Facebook (FB) in more ways than one. Not long ago it seemed to be very exciting to be a Facebook investor, if you were "lucky" enough to get in during the IPO. In hindsight, it wasn't a pot of gold, and part of the problem was that many investors who wanted to buy Facebook, bought shares just so they could unload in on someone else.
A number of people have put deposits and ordered the Tesla Model S, however, it seems that some of them have done so just to "flip" their orders over to another buyer in hopes of making some quick cash. If you check Craigslist.com in major cities like San Francisco, there are currently a number of ads offering to let you buy their place in line for the Model S. To me, this shows that we are seeing some of the same type of speculation in the Model S, as we saw in Facebook, even if it is on a smaller scale. This could be a concern, because the market for electric cars is also much smaller, and depending on how many pre-order deposits were made by people who were planning to flip the car, or perhaps plan to cancel and seek a return of their deposit, it could diminish the current level of sales expectations.
As one Bloomberg article points out:
'More than 10,000 people have made $5,000 deposits to reserve one, Musk said on June 6. "Then what?" said Dave Sullivan, an analyst for industry researcher AutoPacific Inc. "Now everybody that wanted one has got one, where do they find the next 10,000?
Regardless of the potential for speculative "flipping" of the cars or order cancellations, the long honeymoon period of "potential" for Tesla investors is about to meet with reality. Sometimes, it's much
easier to make projections and talk about the future potential of a product than it is to create the demand that will back up the projected numbers. It seems similar to a politician that makes many promises during the campaign which is the honeymoon period, but once elected, the electorate is often quickly disappointed when campaign promises don't meet expectations. If anyone could pull off the amazing feat of starting a new car company that actually meets or exceeds expectations, it's probably Tesla CEO, Elon Musk. However, a number of very capable CEOs have found out how hard it is to sell electric vehicles. Again, the Bloomberg article summarizes the difficulties:
"In the end, this isn't about Tesla or Model S; it's about battery-electric vehicles themselves," said Eric Noble, president of the Car Lab, an industry consultant in Orange, California. While "Model S is beautiful," he said, "proof of the very limited potential of battery electrics already exists in the market itself." U.S. demand for electric-drive cars has so far been less than automakers anticipated. General Motors Co. sold 7,671 Chevrolet Volt plug-in hybrids in the U.S. last year, while Nissan Motor Co. delivered 9,674 Leafs, an electric-car record. Each automaker aimed to sell more than 10,000 of their models."
Another factor for potential buyers that has not been widely reported, is the battery which can be extremely expensive to replace after it wears down or is even permanently damaged from improper battery maintenance. Some electric vehicle owners have learned that by neglecting the battery and letting it completely lose a charge, it can cost many thousands of dollars to replace. One article sums up the potential risks associated with the battery, it says:
Tesla has officially stated that "it is impossible to accurately forecast the cost of future battery replacements", but the Tesla service manager said he expected the Model S battery to cost even more than the Roadster's. If true, it would mean that a Model S battery failure could essentially render the car valueless.
A potential risk for investors is that some of the "demand" for the Model S is from speculators hoping to flip the car. The other risk is that the electric car market is limited, and if it took years to get about 10,000 deposits for orders, it might be very tough to get another 20,000 orders which are expected for next year. With the current price of the stock at elevated levels, it might be a good time to take profits and let these issues settle out.
Here are some key points for TSLA:
Current share price: $31.29
The 52 week range is $21.50 to $39.95
Earnings estimates for 2012: a loss of about $2.44 per share
Earnings estimates for 2013: a profit of about 67 cents per share
PE Ratio: n/a
Facebook, Inc. was one of the most anticipated IPO's in history, but too many investors were hoping to buy shares only in order to immediately sell to others. Many investors believed buying Facebook shares would be a guaranteed path to profits, but that did not work out as expected. Just as media coverage and investor interest was peaking for Facebook just before the IPO, it might also be peaking for now with Tesla, just before and soon after the launch of the Model S.
Here are some key points for FB:
Current share price: $31.09
The 52 week range is $25.52 to $45
Earnings estimates for 2012: 55 cents per share
Earnings estimates for 2013: 67 cents per share
Annual dividend: none
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.