Will Tesla's Spark Last?

Includes: TM, TSLA
by: Mike Maher

Telsa Motor (NASDAQ:TSLA) was surging Thursday, up nearly 20% after receiving an upgrade from Morgan Stanley. The analyst, Adam Jones, raised his price target on the stock, which closed under $24 on Wednesday, to $70, saying:

"The confluence of structural industry change, disruptive technology, changing consumer tastes and heightened national security creates an opportunity for significant new entrants in the global auto industry. California dreaming? We don’t think so."

Shares gapped up Thursday, trading above $28, on 5 million shares in volume by 11:30 ET , nearly 4 times the average full day volume.

A look at Tesla's numbers may temper some of the optimism. Tesla reported (pdf) full year revenues of $116.7 million last year, leading to a loss of $154 million, or $3.04. The loss was driven by an increase in Research and development spending, which was $92 million for FY 2010. The company has delivered 1500 of its Roadster model, and has received reservations for 3700 of the Model S sedan, which it set to begin deliveries in mid 2012. The company also sells battery packs and chargers to Daimler (OTCPK:DDAIF), as well as providing powertrain systems to Toyota (NYSE:TM), allowing it to diversify somewhat from its reliance on its own automobiles.

Given all the competition in the global auto market, as well as the difficulty new entrants into the category have faced, I'm not sure Tesla will be around for the long term in its current form. The company is essentially betting the farm on the Model S, which will start at $49,900 after the $7500 Federal tax credit. The Roadster starts at $101,500, so that won't ever be a volume driver. While Tesla definitely has disruptive technology in its batteries and drivetrains, I'm not sure that it will be able to produce autos that US customers want. Even with faster battery charging, more power, higher speeds and longer trip distances, the company is still in a pricing class where it will have to compete with other luxury autos on handling, looks, and most importantly brand name.

The real value in Tesla is in its technology patents. Tesla is at the cutting edge of electric drive vehicles, pushing the limits on power, speed and efficiency in this industry. Its deals with Toyota and Daimler prove that the company has a model in place to build and supply components for electric vehicles being built by other global automakers, without needing to build its own vehicles. It is this supplier platform that has a greater viability long term, since Tesla could focus solely on where it excels, technology, and not have to compete on automotive styling.

Tesla is still a money losing operation, and won't see profitability until deliveries of the Model S being in full in the back half of 2012, assuming the Model S sells well. Clearly the stock is getting a lot of attention given the upgrade today, as well as the potential for electric vehicles going forward. However, the automotive market is very competitive, and should the Model S go the way of the DeLorean, expect Tesla to follow. The technology has great value, and if Tesla was only a supplier of batteries, chargers, and drivetrains to automotive manufacturers, I'd say it was a winner. As a total package, this is more of a bet on the success of the Model S than it is on the future of electric vehicles, so I'm inclined to stay away.

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

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