The balancing act: The Tesla bubble continues to expand

By From page A4 | September 04, 2013

Two days ago Tesla reported its second quarter earnings amid a soaring stock price reaching a high of $158, but closing at $153 up $19 for the day. What was in the earnings report that could cause this? The report said earnings top expectations. So what were the earnings? The $12 million reported that Tesla lost before interest and taxes means earnings, or in this case losses, were even larger.

Tesla said production surpassed the expected 4,500 units by 650 cars and total revenues from auto sales totaled $401 million or about $78,000 per car (actually sales of cars in the prior quarter were about 400 units lower but generated more revenue). But that number is inflated as part of the revenue (about 17.2 percent) was again from the sale to other manufacturers of zero electric vehicle (ZEV) credits ($51 million) and $18 million of other regulatory credits. In the first quarter that ZEV credit income was $17 million higher. So again the real profit from the sale of Tesla cars was not a $12 million loss but an $81 million loss as ZEV credits are fictitious money manufactured by the government. Yet the stock is flying high. It is the same script that caused the NASDAQ bubble of 2000. The bigger the losses, the higher the stock goes.

With his stock holdings, CEO Elon Musk (the man who created Paypal) is now worth over $4 billion. And since the federal loan has been paid off, Musk is free to sell his stock.

Tesla plans to expand with the expenditure of $150 million in capital outlays, which included 31 acres of land next to its current factory. Musk also said that “buying the land makes it easier for us to achieve that 500k number,” referring to a long-term production goal. Although it was not stated, it is thought that he meant producing 500,000 cars annually.

Tesla claims a healthy European order book as an area of future sales. Geographically it is a much better market as the countries are much smaller. All of England and Scotland is just half the size of California. Europe’s largest country outside of Russia is France, which is almost the size of Texas. So their driving distances are much smaller. Countries like Holland and Switzerland are not even as large as San Bernardino County in Southern California. And Europe has thousands of wealthy people who can afford a nearly $100,000 Tesla. But their market is still limited. The climate however is colder in Europe and batteries don’t perform well in cold climates.

Because of a new debt/equity offering of more than a billion dollars as reported here in a previous column, Tesla is in a good cash position, reporting almost $750 million in cash after paying off its $440 million government loan. Tesla expects to generate cash in every quarter in 2013 from the sale of cars, excluding the sales of ZEV credits to other automakers. That remains to be seen.

Tesla is losing money on every car it sells. It claims a 22 percent gross profit margin on cost of goods sold or the cost of direct car production. But that does not include R&D expense, sales and administrative expenses. In most business, general and administrative expenses are equal to at least half of production costs. Although they hope to increase their gross profit margin to 25 percent, there still is not enough left over to pay the rest of the company expenses. Because the sales are through company owned stores, it eliminates one of the middlemen, but that still won’t save 25 percent.

But the larger problem facing Tesla is the size of the market for a lesser expensive electric car they are supposed to bring to market in three or four years. Total EV and PHEV sales for the year will not top 100,000 units combined. And that is out of about 15 million in total vehicle sales or five vehicles in a thousand. And as reported in a recent Balancing Act column, EV and PHEV makers are cutting prices well below the cost of manufacture.

Tesla, for what it is, is a terrific car by all reports. It performs and handles well. It has stunning looks. But it suffers from three major problems conventional cars do not have. Even at 200 miles, Tesla has a limited range and range anxiety. It takes hours to refuel. And the Tesla costs way too much. I have read about the battery replacement solution to refueling, but that means you need effectively at least two batteries for every car built. That is a huge increase in cost and it is unproven on a mass basis. Other manufacturers have had to resort to huge price cuts to sell their EV and PHEV cars. Customers buy EVs and PHEVs for reasons other than common sense as EVs, PHEVs and regular hybrids still do not make economic sense.

But Tesla by its unique and luxury positioning in the marketplace hasn’t had a sales problem yet. It is only a question of when their market starts to dwindle. It may be sooner than you think. Rumors have been flying about a sale to Google or some other high flyer. At least they can afford to take the loss. Musk will be long gone before that with billions.

Larry Weitzman is a resident of Rescue.

Larry Weitzman

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