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As I said before this is not a value stock by any means, (TESLA is a start up automobile car company for goodness sakes). Automobile companies and air carriers are some of WEB's most disliked businesses.

I am taking a big long term risk on a new technology that no one else need follow.


Greetings Jan -

Back just before New Year’s I paid a rare visit to the upscale mall in my region, and was surprised and a bit impressed to see a Tesla shop right in the center of the mall. I had figured that they had snagged some opportunistic mall space for the holidays (I was wrong) and were taking advantage of the season and that mall’s demographics to make an introductory splash.

Adding to Tesla’s initial impression, the prominent local dealer luxury marques had arranged to station a 9four-door) Porsche Panamera – perhaps the Tesla S’s most direct competitor – right outside the Tesla shop, cordoned off so the mall traffic had to walk around it, and they had also cordoned off an eye-catching Bentley in the middle of things nearby.

The mall was crowded, and everyone it seemed wanted to see and sit in the Tesla. The Porsche and Bentley were completely ignored. The whole crowd scene at the Tesla shop was pretty impressive, and so was the car, even just sitting there.

A couple of evenings later I happened to mention the Tesla shop to a neighbor who was knowledgeable about Tesla’s actual mall deals at that and the other upscale malls across the country and he said no, these weren’t opportunistic placements, Tesla were paying top dollar and signing long-term leases. We got a really good laugh about it and figured that was that – these folks really were fools.

The more that’s come out about Tesla, however, the more impressive their accomplishments. First, before we get into the car itself, its technology, and some valuation thoughts, let’s look at some of the numbers that are being tossed around about Tesla. If we look at those ‘price to sales’ ratios that are being , suggesting that Tesla’s current market cap is at 10x revenues (versus others at well under 1x), we should keep in mind those comparisons appear to be based on ‘trailing twelve months’ revenues.

The Tesla S, however, has only been in production since this past July and even then, in its early days of production intentionally was only releasing one vehicle day. The intentionally slow start was because they wanted to be sure – or as certain as they could be – that they were doing a good job on the early stages of the production run. Looking at 2012 revenue by quarter, $300 million of its $400million revenue was in the fourth quarter. And even that fourth quarter pace was measured. That’s still 4x (2012 Q4 annualized) revenues – but they are also operating at less than 25% capacity, again intentionally – so while a stretch, an eventual 1x, at current market cap, isn’t necessarily crazy.

Still, even with that cautious production start-up, they have built and sold more Tesla S’s than Chevy has sold Volts, or Nissan their Leafs. Their current run-rate – still at a fraction of available capacity – is supposedly something like 20,000 units. To put that in perspective of volumes of competing car models (with similar price points, target customers, performance levels, and cache), that’s more Tesla S’s coming off the line now than Maserati is selling Quadroportes globally, more than Porsche is selling of 911’s (again globally), and fast approaching perhaps its closest-model competitor (at least the way I see it) that Porsche Panamera.

From another perspective, they currently have a back-log of open orders equivalent to 3-times the number of vehicles they’ve produced to date. Again, they are intentionally trying to move slowly and get it right. Volume matters at some point, but if they get production quality right, and can get production volume to levels of positive cash flow, they may have created a valuable enterprise (more shortly).

Now let’s look at what they have accomplished with the Tesla S as a vehicle. Jan, your driving impressions seem to be mirrored by Automobile magazine:

Actually, the Model S can blow away almost anything….. "The crazy speed builds silently and then pulls back the edges of your face. It had all of us endangering our licenses."… its AC induction motor puts out 416 hp and that it blasts to 60 mph in 4.3 seconds. Even those numbers…fail to communicate how crazy it actually feels…..Unlike most electric cars, Tesla's torque amounts to a prodigious 443 lb-ft… [one editor] was so impressed that he arranged an informal drag race to 100 mph with a 560-hp BMW M5. The Model S won.

Of course, practically every new car claims to be revolutionary. But this one actually feels like it is…. there's a sense that even the smallest details here have been lavished with attention in order to be as distinctive and elegant as possible...…For all its high-tech novelty, the Model S does an exceptional job at the things we expect any high-priced sport sedan to do well. The electric power steering is nuanced and well-weighted, with natural buildup just off-center.

Through corners, the Model S exhibits impressive body control and vacuumlike grip despite weighing more than 4500 pounds. Editors also raved about the suspension's ability to soak up bumps that tortured other test cars. It was just as impressive on the racetrack…. it deserves credit for achieving a claimed 0.24 coefficient of drag -- better than a Toyota Prius or a Chevrolet Volt -- without those cars' gawky styling.

[The former manager] of the Ford GT program led development of the Model S's chassis components, and the steering was likewise developed by Ford and Lotus veterans. "The electric motor does not define this car," says Nelson. But it is, at the end of the day, what makes this very good sport sedan an absolute game changer…..more than any electric car that has come before it, the Model S feels and drives like a gasoline car of the same price.

It’s absolutely astonishing to me that a new vehicle – by any manufacturer, let alone a start-up – can be at all seriously, let alone favorably, compared to a $100k offering from BMW (or Porsche etc.). This is an impressive accomplishment for any automaker. Further- and I’ll get off track from my ‘value’ lead-in here – whether it survives or not, Tesla is doing electric vehicle manufacturing in general a huge service in providing aspirational ‘halo’ vehicles. More of the car-driving world than we still want to admit would, given the choice, select something with a hemi under the hood. Or maybe an M5 or one of Porsche’s models. Tesla is offering a vehicle that these same folks could desire on its own terms – and not because it’s ‘pretty good for an electric car’.

As to where the nascent Tesla S fits into the automobile hierarchy – as noted in an earlier post the Economist ran an article about Tesla-the-electric-vehicle in their current auto industry special report. That issue included nine articles – eight others – in which Tesla was referenced more than any other manufacturer. One of those was on the trends for luxury vehicles – commenting on the cache of vehicles such as Rolls Royce, Tesla, and the like (and the failures of other marques in the segment, like Daimler Benz’s again-defunct Maybach). Again, this perceived luxury image is astonishing to me, from a new vehicle from a new manufacturer.

So we’re rooting for Tesla on at least one level. Let’s look at another, though I can’t speak to it and have no idea what it means or what its value might be, if any. MIT magazine ran this article recently:

… strategic decision stands out…..“Tesla’s lithium-ion battery pack technology is five to 10 years ahead of competitors when it comes to a passenger electric vehicle application, as measured by performance and cost to manufacture….Tesla’s battery lead allows it to produce a better vehicle at more affordable price.”

When Tesla was founded, it was based on an idea from J.B. Straubel, now Tesla’s chief technology officer, that commodity lithium-ion batteries designed for portable electronics could be used to make relatively low-cost battery packs for electric vehicles. Thousands of the small, cylindrical cells could be wired together to provide enough energy and power to propel a vehicle for hundreds of miles. To make this work, and to ensure the battery pack would be safe, Straubel had to develop a proprietary system for monitoring and cooling the batteries (see “JB Straubel: Engineering Electric Sports Cars”).

…Fisker, along with other automakers who have introduced battery-powered vehicles, including Nissan and GM, took a very different approach. It bought batteries from A123 Systems, the failed battery startup, that were custom-designed for use in automobiles and made in much smaller volumes (see “What Happened to A123?”). The advantage of these batteries was supposed to be twofold: the batteries were designed to be safer and, because they were bigger and flat rather than cylindrical, they were simpler to package together into a battery pack. A few hundred, rather than thousands, of separate cells would be needed.

But these purpose-built packs are far more expensive….. batteries from now-bankrupt A123 Systems cost between $1,000 and $1,500 per kilowatt-hour. Tesla’s packs….cost between $320 and $420 per kilowatt-hour. And A123’s batteries proved problematic….. A123 later had to recall its batteries...

Who knows.

So will Tesla make it? So far it has accomplished the incredible in terms of performance, technological advance, and even a perception of luxury. It’s already accomplished what a lot of other makers have tried and not yet delivered. (See reviews like these for BYD products? GM’s? Daimler’s alternative fuel offerings, even?) It probably doesn’t have to be a world-beater to be perceived as a valuable automotive property, at least to somebody. And Tesla doesn’t have any of that auto industry-type baggage like legacy costs, excessive manufacturing facilities, CAFE hurdles, and other problems.

For an existing auto maker, Tesla is a no-brainer as an acquisition candidate, and the only question is price – not fit. The technology, its instant impact (and high future potential) on existing manufacturers’ fleet economy standards, its ability to stand alone as a manufacturing unit, or not – all likely give it at least the potential to be one of the more desirable strategic acquisition targets on the automotive landscape, at least for its size. At what price? Who knows. Would, say, some Chinese company bid for it if it were on the block? One of the Europeans?

And what’s particularly interesting is that while it might have particular attraction to an existing auto company – its battery technology; proven performance; perceived quality and brand image – its ultimate disposition may not have to be limited to an auto company. With its design, manufacturing, and even distribution so unique to itself and self-contained, if it is actually able to develop and produce these vehicles without draining further cash, who else might be interested?

Just on a flier – and not that they would – if Google or Apple or anyone else with piles of cash burning holes in their pockets were to have some stroke of something-or-other and decide to take a flier in this segment, what auto manufacturer might they pick up? Highly unlikely, of course. But this isn’t your typical car company. If Tesla proves to be self-sufficient in design and production, and self-funding, and scalable, what price might be too much?

And let’s remember that if anything, its founder knows exit strategies – and he doesn’t have undue sentimentality towards his creations. He knows how and when to go for the payday.

Now don’t get me wrong – I’m not suggesting I’d tag this with its current $5B+ valuation, or that I’d be buying this business at that price. I do think there’s more downside potential at these current levels than upside –but I don’t have much conviction in that suspicion. Given what they’ve achieved and knowing that the founder does understand how - and when - to sell a business, I wouldn’t be quick to sell them short, either.

One thing’s for sure though: what they’ve accomplished is incredible – I would have said unbelievable – and it’s easy to have respect for what they have been able to manage so far, and to cheer for their success. And maybe experience driving one of their cars. I’m not jumping on board, but I hope that Tesla flier really pays off.
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