Eco Investor June 2011

International Companies

Are Tesla’s Shares As Good As the Car?

By Victor Bivell

Electric cars are coming, hopefully big time, so it was great to learn that the first Tesla electric cars are in Australia and on sale. Given the chance to drive one, Eco Investor couldn’t say no. Not only am I keenly awaiting the electric car era, it also seemed like a good excuse to take the shares for a test run as well. I couldn’t help think of that ancient TV ad where the man liked the shaver so much he bought the company. So how good is the car, and does it give you confidence to buy the shares?

Let’s start with some first impressions.

I receive an email from California asking if I’d like to test drive the Tesla Roadster sports car, “the most advanced EV on the global market today”. I’m not a petrol head, nor an electro head, but for proactive marketing and making the company look like it wants to get somewhere, it’s a great start.

The car looks like an expensive sports car. Stylish, open top, even mid-life-crisis red, though I saw a grey one as well. They sell for between $222,995 and $260,535 and they look the part.

It was smaller than I expected. But it’s a two seater, not a family car. And it’s electric so they’ve kept the weight down. It weighs 1,235 kilograms, but the national sales manager, Jay McCormack, tells me there are comparable petrol sports cars a hundred or so kilograms heavier. So it’s in its league.

The engine and gear box unit is much, much smaller than I expected. It’s nothing like a big heavy petrol engine with wires everywhere. It’s small and simple and the only cable I saw was to connect the electricity. Jay tells me there are only four moving parts as opposed to about a thousand for a combustion engine. In this case, small is beautiful.

Eco Investor test drives the Tesla electric sports car, and the shares.

See full-size image

The workshop is spotless. Nothing like the old car garages with the spread and smell of oil and dirty tools everywhere. It’s more like a high-tech lab, clean and sparse, with the occasional nerdy looking machine. This could turn mechanics into semi-glamourous autoelectro- techno-engineers.

The battery is big, nearly the width of the car, but hidden neatly behind the seats. And it does the job. Three driving modes can give up to 394 kilometres. That’s plenty for city and one day country driving.

The battery stores 56 kWh, which is also enough to run the average home for three or four days. It can be recharged for 160,000 kilometres, which is heaps, and even then it only loses 30 per cent of its capacity and the weaker cells can be replaced.

Jay tells me another alternative would be to buy a new battery and use the old battery to store solar or offpeak electricity to run your house. That’s an idea worth thinking about.

Recharging looks easy. There are three ways, each with its own cable. The fat cable needs a special board on the wall but will recharge the battery in three hours. The medium cable has a more common wall fitting found in some motels and caravan parks and takes six hours. The onboard everyday plug-into-the-wall-socket plug takes overnight for a full recharge. For city driving most recharges would be just top ups.

You can’t tell when it has started. No noise. No warming up, revving or spluttering. You put in the key, select a driving mode such as for distance or speed, press the D for drive button, and you can start moving. The first time I missed the start and had to ask Jay to do it again.

It can do what sports cars are supposed to do. The brochure say its can do 0-97 kilometres in 3.9 seconds. It’s like being pinned back when a jet plane takes off, but more so.

It drives like an automatic. If like me you’re too old for exuberant exhibitionism and prefer sedate family driving it can do that too and is very easy to drive.

A five seater family car, the Model S, is only about 18 months away from being available in Australia, and orders have already been taken. That’s great news. It won’t be cheap, but it will be much cheaper than the sports car and more like a luxury BMW, Mercedes or Audi.

The Tesla Roadster is an impressive introduction to electric cars, and seven have been sold in Australia so far. So how good is the company, are the shares worth buying, and what sort of ride will they give?

The first thing to be said about the shares is that it has been a good IPO for investors. The shares listed on NASDAQ in June 2010 at US$17 per share, and have spent almost all that time in positive territory. They are currently at around US$28 to US$29.

The company has supporters. The IPO raised US$226 million, and the company has just finished another capital raising of around US$210 million at US$28.76.

The funds from this latest raising are to develop the Model X crossover vehicle.

But it is still early days for the company. It has IP, first sales, and new products on the way. Early revenues are rising fast. Automotive sales were US$14.7 million in calendar 2008, US$111.9 million in 2009, and US$97 million in 2010. For the March quarter of 2010 they were US$20.5 million, and for the 2011 March quarter US$33.6 million. It seems that people like the cars.

But the company is still a long way from profits and dividends. It has high and rising research and development costs, and still operates at a loss. The history of net losses is US$82.7 million in 2008, US$55.7 million in 2009, and US$154.3 million in 2010. For the March 2010 quarter it was US$29.5 million and for the March 2011 quarter US$48.9 million.

But the company is well cashed up. At 31 March it had total cash of US$148 million and after the latest capital raising this is now US$355 million.

Tesla describes itself as a designer, developer and manufacturer of high-performance fully electric vehicles and advanced electric vehicle powertrain components. It’s a high tech business with big overheads, big competitors and big risks. For Australians there is also the currency risk on exit, though the currently high dollar may ease entry.

The company also has a big market, and big ambitions.

The Tesla Model S four door family car, coming to Australia in 2013.

The question for investors is can Tesla emulate other Californian venture backed tech stocks that have gone on to achieve great success, produce great wealth, and at the same time change their industries?

Like the cars, the shares have had a smooth and fast acceleration. But like the car there is no gear stick. If you hop in, you may as well plan to enjoy the ride. (NASDAQ: TSLA)







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