News Column

Tesla Motors: Big Risk, Big Potential

February 25, 2014

Greg Gardner, Detroit Free Press

tesla motors
2013 Tesla roadster (file photo)

Feb. 23--Once upon a time there was an electric car company whose stock traded at nearly 1,200 times its earnings under generous accounting rules -- it actually lost $74 million in 2013 -- with a CEO who could sell igloos in a desert.

Tesla Motors is that company and Elon Musk is that CEO. But at this point in the tale, the average investor would be well-advised against jumping on the supercharged bandwagon.

After reporting a $16-million loss for the fourth quarter last week, Tesla shares soared more than 8% Thursday before retreating slightly Friday to close the week at $209.60.

The reason was slightly better than expected sales, encapsulated by Musk's "the fish are jumping in the boat" description of his customers, and signs that China sales are poised to soar.

"If you're in your 20s or 30s and want to engage in wild speculation or buy something small for a grandchild, go ahead," said Erik Gordon, adjunct professor of entrepreneurial studies at the University of Michigan's Ross School of Business. "Otherwise it's only for folks with the biggest appetite for risk at this price."

This 10-year-old Silicon Valley company has shocked the world, with its all-electric luxury cars that sell for between $75,000 and $110,000 each. With the help of a $465-million federal loan, which it has repaid, and an existing factory formerly operated by a Toyota-General Motors joint venture, Tesla has exceeded all expectations.

At $210, the market is valuing Tesla slightly less than half as much as General Motors and three times Fiat's market capitalization.

"Tesla should be viewed not as a traditional auto company, but more like an innovative tech company," said Sudip Datta, professor of finance at Wayne State University. "While the P/E is in nosebleed territory and it has lost money, the market is reacting to the great reception it is getting in China and its forward guidance."

The paradox that traditional auto veterans struggle to get their heads around is that Tesla doesn't need to reach the mass market. Last year's Model S sales in the U.S. -- 22,000 -- were half that of the Fiat 500, not exactly a hot seller.

Tesla expects U.S. sales to grow to 35,000 this year, and launch a slightly less expensive Model X SUV in 2015. When you're selling cars for $80,000 or more you don't need to sell many, especially when you operate one plant, don't have to work with dealers and have only modest legacy costs such as pensions and health care.

Musk boasts of the company's 25% gross profit margin, knowing that Wall Street does cartwheels when Ford or GM approaches 10% margins in North America alone.

"I think you have a viable car company model in Tesla, but I don't think you have a market valuation that is equal to half of General Motors," said U-M's Gordon. "It's like being a little kid. When you're 3 years old you're judged one way. When you're 10, it takes more to impress people. Then when you're 30, life gets a lot tougher."

Hedge fund manager Doug Kass of Seabreeze Partners Management already thinks there's too much wind behind Tesla's sails. He has shorted -- sold the shares at a price betting that one can buy them back at a much lower price -- Tesla for some time now and after Wednesday's results he added to his short position.

He also scoffed at reports last week that Musk had met with Apple's head of mergers and acquisitions sometime in 2013, which propelled the shares close to $200. Then the fourth-quarter results pushed it to a new high.

"In my view, the discussions between Apple and Tesla were likely centered more around joint ventures than an acquisition," Kass told the Wall Street Journal. "Stated simply, I can't believe that Apple would be so stupid as to acquire Tesla."

Contact Greg Gardner: 313-222-8762 or ggardner@freepress.com. Follow him on Twitter @GregGardner12

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Original headline: Tesla's risk isn't for every investor


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