Tesla: 1999 Revisited

This is a post I started to write last week, got sidetracked and now it seems a bit timely once more. I’m talking about Tesla, the electric car manufacturer, and frankly I don’t see what the hype is about, why the stock has gone through the roof and why anyone would buy into the secondary offering at these prices.

Let’s start with the business. Tesla makes an electric car, specifically a high-end fairly expensive electric car. Fans rave about the fit, finish and the performance. The reviews from the automotive press have been no less effusive. Fair enough, the company has managed to build a beautiful piece of machinery. But it’s a piece of machinery with a fatal flaw – it can’t go very far with out stopping for a long time to recharge. The now infamous NY Times article about a road trip in an earlier model highlighted the challenges of operating an electric vehicle outside of a fairly limited box. But let’s leave the discussion about the utility of electric vehicles to another day, this is about the financial and stock performance of the company.

There was a lot of oohing and aahing about the Q1 results the company announced last week. The company came in with earnings of .12 cents a share and sales were up to $562 million. All impressive but they still so far as I can see aren’t producing automobiles profitably. Gross revenues included $6.6 million from the production of power trains for Toyota and $67.9 million in zero emission vehicle credits (ZEV from now on). From the 10Q it appears as if they exclude the Toyota payments from automotive sales but include the ZEV credits. Take out the ZEV credits only and you’re looking at a loss of around $56 million.

So all of this sent the stock soaring.

stock chart

Now the initial explanation for the pop about a week ago was that there was a lot of shorts and the earnings report had them running for cover. The numbers don’t lie, more than 40% of the stock ┬áis sold short. That made a lot of sense when the stock popped after earnings came out but I can’t believe that it’s the whole story, particularly when Morgan Stanley raises its price target from $47 to $103. There’s mania here, folks.

Now Tesla’s management group is not made up of a lot of fools, so they took a look at this and figured out that if people were willing to pay this much for a share of the company they should just sell them a lot more. Thus, today, they announced the sale of an additional 2.7 million shares plus $450 million in convertible debt. And that is why I decided to write this deferred little missive.

I’m going to suggest to you that anyone who subscribes to the new stock offering at any price near the current level deserves our pity. This is a company that produces a product that has a market a mile wide and an inch deep. It is not yet profitably producing automobiles and there is reason to doubt that the vehicle can perform up to specifications outside of optimal operating conditions. The real value of the stock is opaque due to the short interest. What’s to like?

Tesla probably has a good chance of surviving and probably will carve out a nice niche for itself in the luxury market. I hope it succeeds but right now the stock looks like something out of 1999. We were supposed to have learned that the fundamentals matter and the hype is nothing more than that.

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