Some Analysts Express Doubts About Tesla's Ability to Survive Next Several Years

Some Analysts Express Doubts About Tesla's Ability to Survive Next Several Years

By Scott Doggett February 1, 2010

In brief:

• Empty dealerships raise concerns
• Ditto the competition Tesla's Model S will face
• Purchase by Daimler speculated

By Scott Doggett, Contributing Editor

One business day after Tesla Motors, maker of a high-end battery-electric sports car, filed to raise $100 million in  an initial public offering, some automotive analysts  were to expressing doubts about Telsa's ability to survive the next several years.

It is, after all, a seven-year-old start-up that's not yet made an annual profit and that presently  currently offers only a $109,000 Roadster and a pricier Roadster Sport - both of which are scheduled to be discontinued possibly as much as a year before Tesla's second electric vehicle, the $57,400 Model S, goes into production.

Still, Friday's IPO filing with the Securities and Exchange Commission represents a landmark in the resurgence of electric-drive technology that most car makers until recently had dismissed as impractical.

Tesla did not provide details on the IPO's pricing or its timing. Assuming another automaker doesn't beat it to the punch, the EV-maker will be the first auto builder to go public in the U.S. since Ford Motor Co. in 1956.

Tesla's move comes at a time when public interest in electric vehicles is growing amid planned EV and plug-in hybrid launches this year by Nissan, General Motors, Ford and Fisker Automotive.

But analysts reached today said the IPO is less likely to serve as a referendum on how investors see the future for electric-drive vehicles as much as it is to signal the degree of faith investors have in Tesla's ability to compete with major automakers.

One who shares that sentiment is Jeremy Anwyl, chief executive of Edmunds.com, parent of Green Car Advisor. He said the IPO will prove more of a referendum on Tesla than on EVs in general.

EVs that bring electric-drive technology into the mainstream - particularly the Chevrolet Volt extended-range electric vehicle - will soon be available, Anwyl reminded. But Tesla is a bit of a hybrid in that it is a high-tech company model transplanted to the auto industry, he said.

"They deserve credit for moving the idea of EVs forward. On the other hand, we can see from the Toyota mess that vehicles are highly complex. I think Tesla has enough fans to give the stock a decent send off, but longer-term success will not come easily," he said.

In the nine months ended September 30, Tesla lost $31.5 million, down from a loss of $57.3 million in the same period a year earlier. Revenue jumped to $93.4 million from $580,000. It has lost it a total of $236.4 million since its founding in 2003.

The company said it would continue to post losses until it begins making "significant" deliveries of its Model S sedan, which is not expected to launch until 2012, barring any delays in setting up an assembly plant - a process that has not yet begun.

But here's the problem: Tesla will stop selling the zero-emissions Roadsters next year. The company, which has opened 10 dealerships worldwide the past two years and says it wants to open 40 more in the next few years, will have a long stretch with nothing for them to sell.

"Anybody's who's really looking at this, are they going to be OK with the fact that for an entire year Tesla's not going to have much in the way of revenue?" asked Aaron Bragman, a research analyst for IHS Global Insight.

Bragman foresees an ominous production problem with the Model S. Because little or none of it is based on an exisiting production vehicle, "they've got to basically create the entire thing themselves, and for a company that doesn't have a huge engineering staff and test centers...that doesn't strike me as altogether feasible," he said in an interview with Green Car Advisor.

"I honestly see Tesla's future as likely ending up as part of a larger company at some point," said Bragman, who has worked as a production buyer at Nissan North America and as a sales/program manager at parts supplier Robert Bosch Automotive. "Daimler in particular looks very interesting that way."

David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan, also wouldn't be surprised if Daimler acquired Tesla.

The German automaker already holds a 10 percent stake in the Silicon Valley EV company and Tesla will be supplying electric-drive systems to the parent of Mercedes-Benz and Smart. Tesla also has said it plans to market its electric powertrains and battery packs to other automakers.

Cole, who has been involved with startups and in taking companies public, has grave doubts about Tesla surviving on its own.

In an interview with Green Car Advisor, he noted that Tesla really hasn't encountered much competition to date, because there aren't many players in the six-figure sports car segment. But lack of competition won't be the case when Tesla comes out with its Model S.

"Then the question is," he said, "Can you be competitive at high volume with a car that's now going to be intensely competed against by everybody in the world? I have my serious doubts whether they can be profitable there, at least early."

He said that Tesla, which isn't speaking with the media regarding its IPO, possibly has an exit strategy that includes sale to another company. Ultimately, it might go public and then sell to Daimler. "Mercedes at some point might be a likely acquirer of the business," Cole said.

In addition to Daimler, Tesla's investors include Google Inc. founders Sergey Brin and Larry Page, Abu Dhabi-based Aabar Investments, and venture capital funds Draper Fisher Jurvetson, DraperValor Equity Partners, Technology Partners, The Westly Group and Compass Venture Partners.

Tesla CEO Elon Musk, with 81 million shares, is by far the largest single stakeholder, however.

David Menlow, president of IPOfinancial.com, told the Los Angeles Times that selling stock to the public could bring Tesla closer to becoming profitable if the company takes other steps in conjunction with the offering.

"This could propel them into a more prominent position in the auto industry," Menlow said. "The question is how they're going to be able to rein in their costs...As we continue to get more information, it's not going to be the sex appeal of the technology anymore, it's going to be 'Are they going to be able to survive?'"

Scott Doggett:  is an AutoObserver.com Associate Editor.