Tesla Motors, the California electric car maker, is enjoying an incredible run. In just the last month, it has reported its first-ever quarterly profit, paid off the $452 million balance of its federal alternative energy loan nine years early, and won an ecstatic review from Consumer Reports, which called the battery-powered Tesla Model S as good or better than any vehicle it has ever tested. Investors are ecstatic. They have pushed Tesla’s stock up 180% this year. At $100 a share, Tesla has one-quarter the market cap of General Motors — even though Tesla’s totals sales amount to less than those of the Chevrolet Corvette.
At about $90,000 apiece, Tesla’s zero emission cars have become a symbol for those in the moneyed class who want to show a commitment to the environment. At the same time, billionaire CEO Elon Musk has emerged as the company’s chief spokesman and cheerleader, encouraging optimistic sales projections and batting away doubters and naysayers who say the company’s shares are overpriced and the cars are overrated. In recent weeks, he’s battled both the New York Times and Barron’s over what he perceived to be negative coverage about the company’s prospects. “I have no interest in an article that debates what we consider to be an obvious point — which is that there is a dramatic reduction in battery costs,” Musk told the Barron’s reporter. “You clearly do not understand the business.” Then he terminated the interview.
Is Musk the next Henry Ford — or Preston Tucker? By getting Tesla (TSLA) into production with a saleable car designed from the ground up, he’s already gone further in the auto business than many people expected (see Henrik Fisker), but Tesla’s stratospheric rise has generated heated debate on websites like Seeking Alpha and Motley Fool as to whether it can continue to expand at its current rate. Here are nine questions for Tesla and Musk:
1. Is Tesla’s stock price the result of irrational exuberance?
As numerous commentators have pointed out, your company’s finances look more like an Internet startup’s in 1999 than those of a traditional automaker. Tesla has made money in only one quarter during its 10-year history, is expected to only break even this year, and make a buck a share in 2014. That works out to a forward p/e of roughly 100.
Tesla could possibly make 35,000 vehicles per year by 2015, but GM (GM) and Ford (F) respectively produced 252,894 and 246,585 vehicles during the month of May in the U.S. alone. GM has a trailing p/e of 11.9 and Ford 10.7. Investors have to decide where the best value lies.
2. Can you make money selling cars without air pollution credits?
Behind Tesla’s $11 million first-quarter profit, analysts figure there is nearly $100 million in one-time or otherwise unsustainable items, including $68 million in zero emission credits that you’ve said will disappear by the end of the year. That will leave a big hole in your operating statement. How will you be able to fill it?
3. AutoData reports that Tesla sales declined 14.7% in May. Is this a one-month blip or a sign that the immediate demand by early adopters has been satisfied?
Part of the auto business is fashion; cars with flashy designs or novel concepts get a big initial boost but have a faster decay in their sales curve than more conventional cars with steadier demand. Teslas are high fashion: eye-catching designs combined with unusual powertrains. The sales slump could also be a sign that your company is exhausting the market for super-premium priced cars. The number of people shopping for Porsches and higher-priced Mercedes and BMWs is thin and essentially finite, and Tesla may have already gotten its share. It is also worrisome that you used to brag about your order backlog, but now you won’t release that information any longer. What is going on?
4. Can you continue to roll out your distribution model nationwide, given the opposition of local dealers and the barriers of state franchise laws?
Instead of using franchised dealers, Tesla is distributing its cars through company-owned outlets. You argue, reasonably, that “existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars.” But that puts you in opposition to state franchise laws enacted in the 1920s to protect independent dealers. Tesla has won court decisions in Massachusetts and New York but suffered setbacks in Virginia and Texas. Advocates of the franchise system argue that independent dealers are essential to provide inventory buffers and to interface directly with customers.
5. Does it really make sense to build a nationwide recharging network?
Since electric cars have limited ranges, everyone agrees that a network of charging stations is essential to their widespread adoption. Supercharger stations can return most of a vehicle’s range in 25 minutes but cost $150,000 apiece. You currently operate eight supercharger stations, including six in California, one in Connecticut, and one in Delaware, and you have promised to install 200 coast-to-coast by the end of 2014. Won’t the supercharger attendant in Nevada or Kansas be as lonely as the Maytag repairman?
6. Is guaranteeing the residual value a smart business decision?
In May, you announced that you will guarantee to anyone who leases a Tesla that it will have a higher residual value after three years than any other luxury car on the market. That’s nice, but who knows what a Tesla will be worth three years from now? As analysts have pointed out, that just shifts the risk from car owners to shareholders. You could be stuck with a lot of vehicles that are worth less than expected
7. Can you bring down the price of batteries far enough to build a $40,000 car?
You have said you will launch a small electric sedan in late 2016 with a range of at least 200 miles and a price point “half” that of the flagship Model S. That means it will start at about the same price as the Nissan Leaf — around $30,000 — but have triple the range. You said you were “pretty optimistic” that the necessary advances in battery technology are achievable without “any miracles happening.” There aren’t many who are equally optimistic.
8. Every other EV manufacturer is struggling. Are you really that much better?
GM just cut the price of the 2013 Chevrolet Volt by $4,000 to boost stalling sales. Nissan sold only 2,138 Leafs in May. The only electric car that has been made so far that could compete with the Model S was the Fisker Karma, which looked attractive, was powerful, and had a high range. Unfortunately, the Karma was not a success, and Fisker is now defunct.
9. Are you in danger of overreaching?
Google (GOOG) founders Larry Page and Sergey Brin were both investors in Tesla before its 2010 initial public offering, and that’s pretty intoxicating company. So perhaps we shouldn’t be surprised that you are talking with Google about adding driverless technology to your cars. “Autopilot is a good thing to have in planes,” you said in an interview, “and we should have it in cars.”
Personally, I’d be happy if you just continue to develop your cars, bring your prices down, and blanket the East and West Coasts with service centers and charging stations. That way, if you don’t become the next Henry Ford, at least you would be the next Walter Chrysler.