May 7, 2014

Tesla risks and Apple rumors

My interest in Tesla started out when I found something in the fourth-quarter earnings release and the most recent 10-K. Based on my analysis, the company reduced its warranty reserve by a hefty $10.1 million, a gain that flowed directly into the income statement and boosted margins. The stock rose substantially, providing a great short entry point. 

Then there were reports of Apple having had discussions with Tesla, allegedly about possibly acquiring it. To me, that was silly. Nothing has come of the rumor. 

Tesla is being capitalized at about $1.2 million a car, versus roughly $10,000 a car for Ford Motor. A lot of future growth is in Tesla's share price. The narrative has moved to Tesla's plan to build the world's largest battery factory—a risky move. With a market cap of about $26 billion, Tesla has a lot of execution risk and competitive issues. The hope for bulls is that the Gen III vehicle—a lower-priced vehicle [than Tesla's core Model S sedan] to be launched in 2017—will be enormously successful. 

We think the new Tesla will be hit by pricing pressures from incumbent manufacturers with deep resources, which have demonstrated a willingness to lose money on electric vehicles and have a big head start in mass production.