Tesla and its high-flying shares defy odds, still face skeptics

Tesla has to find ways to cut the cost of its vehicles, now priced from about $71,000, to draw more mainstream buyers and turn back potential challenges from larger, established automakers as they expand their electric vehicle lines, analysts say. Photo credit: BLOOMBERG

UPDATED: 2/28/14 4:20 pm ET - adds closing stock price

(Bloomberg) -- Tesla Motors Inc., propelled by praise from Consumer Reports and plans to build a better battery and expand in Asia, has cemented its place as the highest-flying automobile stock in at least two decades.

The luxury electric-car maker's shares have rallied 619 percent in the last 12 months, a performance unmatched by any global automaker in at least 20 years, according to data compiled by Bloomberg.

The almost 15-fold jump in Tesla's share price since its June 2010 initial public offering is also bigger than any U.S. stock that has debuted since 2006.

While further gains may become more challenging with Tesla now trading at 154 times estimated earnings, the youngest U.S. carmaker has already beaten odds that crushed startups such as DeLorean Motor Co., Tucker Car Corp. and Fisker Automotive Inc.

"Its combination of technology, glitter and utility, while being a leader in a segment that has a lot of potential, is leading buyers and investors to Tesla," said Alan Baum, an analyst at Baum & Associates in West Bloomfield, Mich., who tracks alternative-powertrain autos. "They're leading a new segment with a product that transcends the segment it's in."

Tesla's market capitalization has swelled to $30.06 billion -- more than half that of General Motors and nearly half that of Ford Motor Co.

Tesla's share price run-up also gave Musk an opening to sell $2 billion of convertible notes, up from an initial plan to offer at least $1.6 billion, to fund his new battery plant.

The increase in Tesla's stock price has helped boost CEO Elon Musk's wealth so far this year by more than any American other than Facebook Inc. CEO Mark Zuckerberg.

Investor enthusiasm

While Tesla delivered only about 22,400 electric Model S sedans in 2013, its plans to build the world's biggest battery plant, expand into China next month and accelerate production more than 55 percent this year is energizing investors, whose enthusiasm has lifted the stock 68 percent this year through Thursday.

Consumer Reports named the Model S the year's best car, the latest in a string of accolades from the magazine.

Enthusiasm for Tesla must be balanced by a recognition of challenges ahead as the Palo Alto, Calif.-based company works to boost sales more than 20-fold from 2013 to Musk's goal of at least half a million, said James Albertine, an equity analyst with Stifel, Nicolaus & Co., who rates the company a hold.

"As a luxury manufacturer they've done very well, but they have a long way to go to get to the mass market," Albertine said by phone. "I remain skeptical that they can get from 35,000 vehicles this year to 500,000 10 years from now."

DeLorean, Tucker

Startups DeLorean and Tucker were both born before the era of modern electric cars and fizzled in a matter of years.

John DeLorean's DMC-12 coupe, featured in the "Back to the Future" films, became an automotive icon in the 1980s, famed for its stainless steel body and gull-wing-doors.

The company suffered cost-overruns and crushing debt with production at its sole factory in Belfast, Northern Ireland, ceasing in 1982 about three years after it opened.

Likewise, entrepreneur Preston Tucker's namesake carmaker, intended to shake up the U.S. auto industry with safety features and designs considered highly advanced for the 1940s, failed after about three years. Like DeLorean, Tucker was felled by limited funds, as well as accusations of financial improprieties.

Steadfast skepticism

Tesla has to find ways to cut the cost of its vehicles, now priced from about $71,000, to draw more mainstream buyers and turn back potential challenges from larger, established automakers as they expand their electric vehicle lines, Albertine said.

"On the vehicle side, I am pretty steadfast in my skepticism at $200 or above," Albertine said, referring to Tesla's stock price. "I'm a bear."

Still, the gigafactory has the potential to benefit Tesla in the long term, he said.

Given the scale of such a facility, over time Tesla's benefit may be greater as an energy-storage company than a carmaker, he said. "My bull case is in the case that the cars become ancillary."

The factory, which may cost as much as $5 billion and employ 6,500, will be in Texas, Nevada, Arizona or New Mexico, Tesla said.

"Hopefully, we'll have that plant up and running in about three years," Musk, the 42-year-old co-founder and biggest shareholder of Tesla, said in remarks to the California Public Utilities Commission yesterday in San Francisco.

Tesla said this week that the plant would surpass any current lithium-ion cell factory in the world and reduce battery costs by at least 30 percent.

Cheaper batteries

Such a factory would lower Tesla's battery costs and help the company almost double its share of the global car market to about 1 percent, said Adam Jonas, a Morgan Stanley analyst.

By lowering the cost of energy-storage with its lithium ion batteries, Tesla could also accelerate the disruption of the electric-utility business, he said. Utility customers throughout the United States have already begun turning to battery storage and solar panels as a way of reducing electricity bills and their dependency on local power companies.

The trend threatens the more than 100-year-old monopoly utility business model that books about $360 billion in annual power sales.

Musk's wealth

With each Tesla capable of storing enough energy to power the average house for 3.5 days, a growing population of Tesla cars represents a significant increase in how much electricity can be held in a country's infrastructure.

Worldwide, the market for energy storage is expected to grow from about $500 million to about $12 billion in 2023, according to Navigant Consulting Inc.

The rise in Tesla and value of SolarCity Corp., in which Musk is chairman and biggest shareholder, boosted his wealth to $12 billion as of Thursday's close, according to the Bloomberg Billionaires Index.

Musk's $4 billion net worth gain this year is the second-most among U.S. billionaires, behind Zuckerberg's $6.1 billion increase.

Shares of the carmaker named for inventor Nikola Tesla closed down $7.73, or 3 percent, at $244.81 in Nasdaq trading Friday in New York.

They had surged 20 percent to $252.54 this week through yesterday, leaving them trading at 154 times estimated earnings for 2014. GM is valued at 9.6 times estimated profit, while Ford trades at 11.4 times, data compiled by Bloomberg show.

"If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again," Jonas, who rates the shares overweight, wrote in a research note this week. ''If Tesla can become the world's low-cost producer in energy storage, we see significant optionality for Tesla to disrupt adjacent industries.''

Grid storage

Jonas raised his projection for Tesla's share price in 12 months to $320 from $153. The new estimation uses a 15-year outlook to allow time for the company to expand its lineup and capabilities.

In a bull-case scenario, he said the company may be worth as much as $500 a share.

''The scale of Tesla's battery production, even for its own use as an auto manufacturer, thrusts the company into 'key player' status for grid storage," Jonas said. The battery plant would be built with partners, and "there's a likelihood Panasonic would be part of it," Musk told Bloomberg last week.

Panasonic Corp. is both a Tesla investor and its main supplier of lithium ion cells. Panasonic's participation is "not 100 percent confirmed," he said.

Stock reignites

The run-up in Tesla shares this year began after the company's surprise announcement Jan. 15 that fourth-quarter car deliveries were about 20 percent higher than it had forecast. Since then, the stock has gained 54 percent.

The latest resurgence for Tesla comes after a lull in its value that began Oct. 1, the day after the stock's previous closing peak of $193.37.

That month the company had to combat its first major crisis: reports of three battery-pack fires, two in the United States and one in Mexico, involving Model S collisions.

In each case, drivers of the luxury cars were unhurt. The National Highway Traffic Safety Administration is reviewing the two U.S. incidents, which both involved drivers hitting road debris while traveling at highway speed. The agency hasn't said when its probe will be concluded.

The fires and a garage blaze in Irvine, Calif., last year that occurred while a Model S was plugged in led Tesla to make software modifications to adjust the car's ride height and charging cycle.

The company is also replacing charging plugs used by customers to further limit potential overheating when the car is recharging. While the news was followed by a drop in the share price, it didn't hurt Model S deliveries.

"They're probably doing better because they are a small, growing company. Not being a big, established automaker is probably propelling Tesla forward," Baum said. "In the luxury business, you want to be a few cars short. They are a lot of cars short."

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