Since A123 Systems (AONE), one of the high-profile alternative energy companies, filed for bankruptcy protection few days back, many people have their eyes on Tesla's (TSLA) future. Tesla is another project of the Obama government to enhance green technology in the country and is being discussed alot in the presidential election campaigns. While President Obama sees it as a step towards the target of getting one million electric cars on U.S. roads by 2015, Mitt Romney, the GOP candidate, thinks that Tesla has been a waste of tax money.
However, we have always reported that Tesla's story is a bit different from that of regular electric cars like GM's (GM) Volt, Nissan's (NSANY.PK) Leaf and Fisker. The stylish Model S is comparable to the flagship models of Porsche (POAHF.PK) and BMW (BAMXY.PK). Hence, calling Tesla's stock a risky one based on the bleak outlook of the electric cars industry does not do justice to Tesla and its Model S.
AONE, the electric car battery maker, filed for Chapter 11 bankruptcy protection after it failed to meet interest payments of $143 million on its debt. A123 received $249.1 million in grants from the Department of Energy (DOE) in 2009 to build a factory in the U.S. Apart from this, Obama has invested almost $5 billion of taxpayers' money in order to achieve his target by 2015. However, electric vehicles sales since 2011 have totaled only 50,000, which is only 5% of the overall target.
Tesla has already received the entire loan of $465 million from DOE. After AONE's episode, the market is closely watching the deal between Tesla Motors and DOE. At the start of this month, DOE did not put penalties on TSLA for breaching some of the loan covenants. In return, DOE has asked TSLA to accelerate loan payments. The deadline for the submission of the revised loan schedule is October 31. However, according to Tesla CEO Elon Musk, Tesla has accepted DOE's loan payment terms because it had excess cash available after the second offering. In fact, Musk claimed that Tesla was on the verge of having positive cash flows by the end of next month. Although this claim seems far from plausible, given that the company had only $80 million in cash reserves until the start of October (before the share offering), it is clear that money will start pouring in as soon as the company starts delivering its Model S. A standard Model S costs $52,500 and can be reserved for $5,000. The remaining amount has to be paid on delivery. The company has also started making cash through Model X reservations. Tesla is currently at the steepest portion of its production ramp, according to Musk, and therefore appears to be "much further behind than it actually is". The increase in cash would be offset by the production increase, and therefore, liquidity is not expected to improve in the near future. Cash flows are expected to become positive in the second half of 2013.
Tesla's story is completely different from AONE. As already mentioned, Tesla's prospects are not limited to only the energy efficient vehicle market because of its stylish design and wide variety of features. Had it been a conventional electric car maker, Tesla would not have been increasing its production in an environment where GM twice halted its Volt's production and Toyota (TM) has said that it overestimated the electric car market.
The JCI Angle:
A123's products are not going down the drain. Auto parts manufacturer Johnson Controls (JCI) has decided to buy AONE's automotive assets for $125 million, including two U.S. facilities. AONE has some of the most advanced batteries in the market and has partnerships with big OEMs like BMW, Daimler and Navistar (NAV). Tesla is faced with a significant threat in the shape of JCI's acquisition of AONE. With advanced battery technology in hand, JCI may be able to give tough competition to Tesla's products with some of its vehicles.
Tesla has a strong product to offer to its customers. The company's revenues are expected to multiply 14 times in four years according to a Morgan Stanley analyst. The 44% of the float being short shows that a majority of the investors are bearish on the stock's future. AONE's incident has set off alarm bells in the market. However, we feel most of the concerns are overdone. The situation will be clarified further after the earnings release on November 5.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.