The Washington Post
May 16, 2013

Tesla’s market value soars, but some see a bubble

Teslas Model S electric car tied an older Lexus for the highest score ever recorded in Consumer Reports's automotive testing, the magazine announced on May 9. (Paul Sakuma/AP)

Tesla Motors is on a remarkable run for a company that not long ago seemed to be sputtering.

The luxury electric-car maker’s flagship sedan, the Model S, won Motor Trend’s 2013 car of the year honors, then earned a rare, near-perfect rave from Consumer Reports.

In the past month, Tesla’s stock value has doubled to more than $90 a share. That gives the California-based company a total market value of $10.6 billion, greater than that of Italian automaker Fiat, worth less than $8 billion. Such dramatic success, and the brash confidence of founder Elon Musk, has some fans calling Tesla the first successful new American car maker in more than a generation.

But some analysts say the electrifying rise is not what it seems.

Take that Fiat comparison: In the first quarter of this year, Fiat sold 1 million cars and made a $40 million profit. Tesla sold 4,900 cars and, not counting the sale of regulatory credits under California law, lost $53 million, or more than $10,000 per car.

Whether or not Tesla survives or thrives has become an important test of U.S. policy and automotive strategy. The Energy Department gave it a $465 million low-interest loan; President Obama has delivered generous subsidies for electric vehicles.

While the sale of electric cars will fall far short of Obama’s goals, Musk is taking an unconventional approach to establishing his brand. Instead of trying like the Chevy Volt to compete with moderately priced cars, Musk has wooed wealthy buyers with a sleek, four-door sedan that handles like a sports car and can cost more than $80,000. He plans to work his way down toward the mass market with future models.

Doubters have been waiting for Tesla to run out of cash, which it seemed poised to do last year, but it hasn’t. And Musk is moving to take advantage of the high stock price. On Wednesday, Tesla announced that it would raise $830 million in new stock and debt offerings, which it would use to repay ahead of schedule its oft-criticized loan from the Energy Department. Musk said he himself would buy $100 million of the offerings, and the stock climbed still higher.

But some analysts still say the company’s share price is a bubble on a par with foamy tech-era stocks. It is selling for roughly 600 times its estimated 2013 earnings.

Moreover, Tesla would have booked a first-quarter loss without the $68 million sale of special credits created by California regulations that reward makers of “zero-emission” vehicles. The ZEV credits have provided more assistance to Tesla than have generous federal incentive programs.

California’s Air Resources Board has mandated that large-volume sellers of cars must together meet a minimum quota of 7,500 zero-emission vehicles this year and next. Those who fall short must buy credits from those who produce more than their share.

Tesla’s strategy of building cars with 200-mile ranges dovetails with the ZEV rules, which say that cars with a 100-mile range get three credits per vehicle, while those with a 200-mile range get four. Long-range cars with 15-minute recharging capability get five credits, and Musk has hinted that a faster recharging device will soon be unveiled.

Rival companies privately lament that they have been effectively subsidizing Tesla. Morgan Stanley analyst Adam Jonas said in an April 26 report that Tesla made $40.5 million, or $13,900 a car, through the sale of ZEV and other credits to other car companies in 2012. Jones estimates that Tesla could earn $250 million this way in 2013. In the first quarter of this year, ZEV credit sales accounted for 12 percent of Tesla revenues, Musk said.

However, that calculus will be changing, said Menahem Anderman, president of Advanced Automotive Batteries, which reports on the industry. By the end of the year, the six major automakers that need to meet the 2013-2014 California mandate will all have their own electric vehicles available, Anderman said.

Musk said in a letter to shareholders that “we expect [sales of credits] to decline significantly in future quarters” and that the price of credits had already fallen. But he said that Tesla plans to have a 25 percent gross profit margin “assuming zero ZEV revenue.”

At the moment, that is just one of several uncertainties facing Tesla. J.P. Morgan’s auto analysts said in a May 9 report that “we continue to have some concerns regarding the market appeal of a more mass-market electric vehicle” and worry that Tesla could be restricted to the relatively small luxury-car niche.

Yet automobile analysts are along for the ride with Tesla. After Tesla’s share price zoomed past his target, Morgan Stanley’s Jonas on Tuesday more than doubled his price target to $103 a share from $47. Tesla shares closed Thursday at $92.25, up another 9 percent. (Morgan Stanley is one of the co-managers of the Tesla debt offering.)

Some experts who believe the stock is overblown say that demand for Tesla cars “could materially wane” after a finite number of early adopters are satisfied.

J.P. Morgan’s analysts also said that Tesla “still has its work cut out for it” to meet Musk’s target of a 25 percent gross profit margin. The gross margin in the first quarter stood at 5.7 percent after excluding ZEV credits.

Anderman added that Tesla still doesn’t have a track record that reliably tells consumers (and investors) how long batteries will last, how much it will cost to service them, or how much that will affect resale value. The company has made some guarantees that could prove costly to deliver.

Analysts also point to some positive signs for Tesla. It lowered costs, produced more cars than expected, hasn’t reported major reliability problems and produced battery packs for Toyota and Daimler-Benz. Musk forecasts the sale of 21,000 cars, which would give Tesla nearly 10 percent of the market for passenger cars costing at least as much as Tesla’s base price.

The company’s major shareholders, after Musk, include Fidelity Investments, Morgan Stanley, Abu Dhabi Water & Electric and Daimler.

Then there is the Musk factor. Born in South Africa, he made a fortune in Zip2, a firm that sold software for online content, and PayPal. Since then, he has founded SpaceX for commercial space flights, Tesla Motors, and SolarCity, which designs, finances and installs solar energy systems.

Like many auto industry executives, Musk has a flair for salesmanship and tweets several times a day. He has introduced generous financing plans for his products, opened up about three dozen spiffy dealerships and fiercely attacked a negative piece about the car’s range in the New York Times.

For now, he has prevailed over the naysayers. Tesla has no liquidity problems like those that forced Fisker Automotive, another electric-car company, to halt production. And its product’s reviews have been good. “So is the Tesla Model S the best car ever?” Consumer Reports asked last week. “We wrestled with that question long and hard. It comes close.”

All the enthusiasm has made life difficult for short sellers, who had been betting heavily on Tesla stumbling. (Short sellers borrow and sell shares of a company and make money if the price falls before they have to return the shares.) As recently as February, shares being shorted amounted to about a third of Tesla’s free-trading stock. Now it's down to about 11 percent.

As the share price rises, however, short sellers often scramble to cover themselves before the price rises even further. When they do that, short sellers can drive a stock price even higher in what is known as a short squeeze.

That might account for part of the recent run-up in Tesla’s price. Musk, who has a stake in Tesla worth nearly $2.5 billion, has been taunting the short sellers on Twitter. “Seems to be some stormy weather over in Shortville these days,” Musk wrote on April 25.

Some analysts think the short sellers’ belief that Tesla’s horizons are limited might be proven right — in the long run.

Anderman said that “in two to four years they can be looking at a stagnant or shrinking market, increased service and warrantee costs, and reduced revenue from ZEV credit sales and battery pack sales.” But, he said, “in the short [term, it] looks exciting and what they have done so far is brilliant.”

Written by Steven Mufson