Tesla Motors: Is It Time to Buy Into the EV Revolution?

With shares of Tesla Motors (NASDAQ:TSLA) trading around $33.00, is it a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

H = High Quality Pipeline

Tesla Motors is in the business of designing, manufacturing, and selling electric cars and electric vehicle powertrain components. Broadly, its strategy has been to first produce high-end cars for early adopters, and then transition into the mass market. There’s a lot more to be said about Tesla’s product line than is contained here, and there is a massive amount of conversation surrounding its vehicles. But at a glance, the company has produced quality, innovative cars, and promises more to come.

Tesla’s first vehicle was the Roadster, a battery-electric sports car produced between 2008 and 2012. The Roadster was the first production BEV to use lithium-ion battery cells and travel more than 200 miles on a charge. At a base price around $109,000, over 2,350 have been sold so far. The amazing quality of the car took many by surprise, and in many ways, legitimized electric vehicles.

The Model S is a full-sized electric sports sedan that was officially launched to customers on June 22, 2012. The first 1,000 were Signature series models with 85 kWh battery packs that have a range upward of 300 miles. The base Model S will start at $49,900 after a $7,500 federal tax credit for a 40 kWh battery unit that has a range of around 160 miles. The Model S recently won Motor Trend’s Car of the Year award for 2013.

The Model X is a full-sized battery electric crossover sports utility vehicle that was unveiled on February 9, 2012. Deliveries are planned for 2014.

A = A-Level Management Runs the Company

Over at Glassdoor.com, Tesla Motors CEO Elon Musk has an 83 percent approval rating.

Musk has a long list of accolades related to his achievements in engineering and business. After selling a company called Zip2 to Compaq for $307 million in 1999, he made his name as a co-founder of PayPal (NASDAQ:EBAY).

In 2002, he founded Space Exploration Technologies, commonly known as SpaceX. In 2008, the company landed a $1.6 billion contract from NASA to transport cargo to the International Space Station, replacing the Space Shuttle program after it retired in 2011. He is currently CEO and CTO at SpaceX.

In 2003, he co-founded Tesla Motors, where he remains chairman, product architect, and CEO.

In 2008, he was named by Esquire magazine as one of the 75 most influential people of the 21st century.

In 2009, he was awarded The Golden Space Medal by the Fédération Aéronautique Internationale for the ambition and achievements of SpaceX.

Also in 2010, he was listed as one of Time Magazine’s 100 people who most affected the world in the Thinkers category. And, although not necessarily an accolade that demonstrates his ability to lead a business, Elon Musk is reportedly one of the inspirations for the characterization of genius-billionaire-playboy-philanthropist Tony Stark in Iron Man. He even had a cameo.

In 2011, Forbes listed him as one of America’s 20 most powerful CEOs under 40.

T = Technicals on the Stock Chart are Strong

As of November 19, the stock price is 7.85 percent above its 20-day simple moving average, or SMA; 9.62 percent above its 50-day SMA; and 3.43 percent above its 200-day SMA.

Since the beginning of 2012, the stock price has been in an upward trend, gaining 17.27 percent this year to date, and gaining 3.68 percent year over year.

The stock is trading in a 52-week range between $22.64 and $39.95 per share with a beta of 1.26.

E = Earnings Are Not Increasing Quarter over Quarter

Top- and bottom-line growth are both important in diagnosing how well a company is doing. Over the past five years, Tesla Motors has been posting steady increases in revenue, while earnings per share have been increasingly negative. This trend can largely be attributed with “start-up” costs, despite the company’s age. Not only is automotive manufacturing capital intensive, but Tesla has had to pioneer much of the technology it uses. Despite the earnings declines, recent events suggest early investments will pay off.

2007 2008 2009 2010 2011
Revenue ($) in thousands 73 14,742 111,943 116,744 204,242
Diluted EPS ($) (0.84) (0.89) (0.60) (1.63) (2.53)

Quarterly revenues also indicate ramping losses and some volatility in revenue. At pretty much any other company, the mounting losses would be a strong indicator of it steamrolling toward bankruptcy, but once again recent events would indicate otherwise in this case. Tesla’s business model is — perhaps foolishly, perhaps unavoidably — predicated on the idea that it will initially lose money.

That being said, it’s easy to look at losses and say “these are to be expected” and remain blind to underlying problems. But given the outstanding success of the Model S, it seems reasonable to conclude an earnings turnaround in the future.

Sept. 30, 2011 Dec. 31, 2011 Mar. 31, 2012 June 30, 2012 Sept. 31, 2012
Revenue ($) 57,666 39,375 30,167 26,653 50,104
Diluted EPS ($) (0.63) (0.81) (0.86) (1.00) (1.05)

Eleven analysts predict fourth-quarter EPS to come in at a loss of $0.51 per share, and 1Q13 EPS to come in at a loss of $0.13 per share. Estimates for full-year 2013 earnings come in at an average of $0.16 per share. If the predictions represent a realistic trend, then earnings should turn positive sometime in 2013.

It’s worth pointing out that in three out of four of the past quarters Tesla’s earnings have come in below estimates.

T = Trends Support the Industry in which the Company OperatesTesla Roadster and Model S

Given the scale of its particular ambition, Tesla Motors is in many ways a totally unique company. Some of its peers are small, privately held companies such as Universal Electric VehicleFisker Automotive, and Persu (formerly Venture Vehicles), but they are farther removed from realizing mass-market ambitions. Tesla’s major competitors could be more readily seen as automotive giants like General Motors (NYSE:GM) and Toyota Motors (NYSE:TM).

GM’s positively-reviewed Chevrolet Volt is currently the best selling plug-in in America. Toyota’s ever-popular Prius is the natural landing spot for fuel conscious customers who aren’t ready to give up gasoline entirely. Tesla is still selling to early adopters, not the mass market, so direct comparisons are a bit frivolous. If and when the day comes, the interplay in the auto market will be much more complicated, but the company would ultimately compete with the big boys.

Electric-drive vehicle sales for the first 10 months of 2012 have already out-paced sales for 2011, with BEV sales rapidly picking up. The electric-drive market share has grown from 2.23 percent of the vehicle market in 2011 to 3.3 percent so far in 2012.

Conclusion

Elon Musk and Tesla Motors are effectively trying to change the world one electric powertrain at a time. The company is staying true to its mission, producing great vehicles, and making good strategic decisions against tough economic headwinds.

That being said, it is in a risky position. It is too early to guarantee success. Mass market adoption of electric vehicles is still years away, and there are a thousand obstacles to face along the way. However, if the tipping point comes, Tesla will be at the head of the pack.

With its earnings situation looking grim for at least the next few quarters Tesla Motors is a Wait and See. Of course, investors with faith in the company’s mission and willing to accept more risk could see this stock as long-term buy.

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