Tesla Going For Broke Or Big Time

By Scott Doggett April 1, 2011

Tesla Boom or Bust.jpg

You may remember, or at least can imagine, the mid-1980s TV commercials that went like this: Two people are in a crowded place and one says to the other, "My broker is E.F. Hutton and he says," at which point everyone stops what they're doing and leans in to listen. It's like that with Adam Jonas, leader of the global automotive research team at Morgan Stanley, the Manhattan-based bank with $1.7 trillion in client assets under its management. When Jonas speaks -- or rather, when he writes his "research notes" regarding automakers and their financial futures -- investors listen.

Adam Jonas Morgan Stanley.jpgOn Thursday, Morgan Stanley published a 50-page "note" by Jonas (left) about Tesla Motors, the Palo Alto, Calif., maker of electric vehicles that has yet to turn a profit and in February reported a fourth-quarter net loss that widened to $51.4 million from $24.2 million a year earlier -- growth it attributed to increased investment in the Model S, a battery-electric sedan that will enter production mid-2012 with a base price of  $57,400.

Commenting that "there are few things in business as risky as starting an auto company, especially one that relies on entirely new technology that is not likely to be competitive versus the established internal combustion engine for more than a decade, " Jonas wrote that "conditions are ripe for new entrants and we believe Tesla can be a significant volume player in the auto industry."

The Big 4
How significant a volume player can Tesla be? "America's fourth automaker," Jonas said. "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," he wrote. "California dreaming? We don’t think so. In our view, the conditions are ripe for a shake-up of a complacent, century-old industry heavily invested in the status quo of internal combustion. The risks are high. So is the opportunity. Enter Tesla."

Tesla shares were initially offered to the public on June 29 of last year. Since then the stock price has reached $36 but most recently it's been hovering around $22. However, with the release of Jonas' notes, Tesla's stock price surged $4.04, or 17 percent, to close Thursday at $27.75. Even at that price, Jonas suggested, the stock is grossly undervalued. He gave the stock a one-year price target of  $70 and a bull-market scenario of $135.

110331 tesla motors stock price history noted.jpgThat's if the company doesn't go belly-up first. As we reported last week, Tesla executives are worried enough about the profitability of the company that, in the words of Tesla Vice President and Chief Technology Officer J.B. Straubel, in reference to the upcoming Model S (below): "We're tracking every line item mercilessly. I mean it's something we're focusing on incredibly closely today, because we can't sell this car at a loss. That's not something Tesla can support. We have to be profitable and we have to be profitable with the vehicles that we field."

Jonas is the most wildly bullish of the six price targets from Tesla analysts tracked by FactSet Research Systems, a financial data company headquartered in Norwalk, Conn. The next closest one-year target has Tesla at $30 a share. Dan Galves, a member of Deutsche Bank's Global Auto/Auto Parts equity research team and the bank's lead analyst on vehicle electrification, has a $21.50 price target for Tesla and a "hold" on its shares.

Going Broke?
Tesla's only other model, the wonderfully quick and maneuverable $109,000 electric Roadster (top), has not come close to carrying the financial burden of the talent-rich company, but the quality and innovation that went into its electric components has spurred investment by, and partnering with, Toyota, the world's largest automaker, and Daimler, the world's oldest. Fifteen hundred Roadsters have been made since production began in early 2008. Production of the model will cease this year -- well before the Model S enters production. Jonas said he doesn't believe that Tesla will run out of money before the sedan can be launched, but he cautions that there's "not much room for error."

Not much at all. Tesla generates some revenue for work it's doing for Toyota and Daimler, revenue that may or may not grow as time goes by. But to become profitable, the EV maker must, as Straubel put it, be profitable with the vehicles that it fields. With Tesla expecting to manufacture only 20,000 Model S sedans a year at full production, it will have to make a tidy profit on each one to enable it to produce less-expensive models at much greater volumes. And it does have several more-affordable models on the drawing boards.

Boom or Bust Model S.jpg

E-Things To Come
These include an all-electric sport utility vehicle that should appeal to people who love the size of a smaller or mid-size SUV but want the third row of seats and the cargo space generally found only in larger people-movers. Tesla could produce such a product, because its vehicles aren't burdened with the large internal combustion engines and most of the most space-gobbling systems that accompany the engines.

However, not only Tesla but most of the world must change for the company to thrive, Jonas noted. Specifically, the price of gasoline must continue to rise and government support to accelerate a shift to electric-drive vehicle from conventional combustion-engine vehicles must increase, so that by 2020 electric vehicles comprise 5.5 percent of global car shipments.

By that time -- less than a decade from now -- Jonas expects volume at Tesla will have surged from a total estimated 2,400 units by this year's end to 240,000 units annually, bringing in sales of $9.5 billion, earnings of $1.5 billion before interest, taxes, depression and amortization, and net income of $976 million.

The trick to getting from here -- steep quarterly losses -- to there will be having enough cash on hand to survive until 2014, when, as Jonas sees it, the company could achieve operating profitability. Until then, Tesla's "gross liquidity" could fall to $146 million by 2013 from what may be $362 million this year, making life in the fast lane very tough going. Of course, more glowing notes from Jonas could help with that liquidity issue.

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