Not since the dot-com era has so much hoopla surrounded a company going public with such a questionable business model.
But that’s not for us to worry about. Instead, we can profit from it.
In fact, I think we can make about 90% in the next 6 months by betting against the crowd. That means almost doubling a small $1,000 investment!
The company went public on a day when the Dow was down over 2.5% and the NASDAQ was down almost 4%.
And its shares still rose by 40%.
Since the company’s inception, it has lost $290.2 million. In 2009, it lost $55 million. In the first three months of 2010, it lost $29.5 million.
The problems don’t stop there.
As part of the company’s “road show” to drum up investor interest, it put together a 259-page prospectus. And 42 of those pages were dedicated to addressing the risks the company faces.
Here are some of the highlights:
“We have a history of losses and we expect significant increases in our costs and expenses to result in continuing losses for at least the foreseeable future.”
“We anticipate that we will experience an increase in losses and may experience a decrease in automotive sales revenues prior to the launch of the Model S.”
“We face significant barriers in our attempt to produce our Model S, and if we cannot successfully overcome those barriers our business will be negatively impacted.”
Would you want to own that company?
But guess what? It just raised another $226 million with its IPO.
And the U.S. Department of Energy loaned these guys $465 million!
The company is Tesla Motors (TSLA).
I Want to Love Tesla
Anything that can break us away from our dependence on oil is a good thing in my book. And Tesla offers that opportunity in a sleek and sexy package. Based on a Lotus chassis, the Tesla Roadster can accelerate from 0-60 mph in a scant 3.9 seconds and travel 236 miles on a single charge.
But beyond pretty looks and incredible performance, it doesn’t have much to offer.
The price tag is north of $100,000, and there are only 8 dealerships in the U.S.
And as of March 31, they had only sold 1,063 cars.
That works out to a $273,000 loss per car sold.
You may have noticed that some of the prospectus highlights I pointed out above mentioned the company’s “Model S.”
Tesla has a “rolling prototype” for the Model S, but, to date, hasn’t completed the “engineering, manufacturing, or component supply plans.”
The four-door, five-passenger sedan — aimed at the luxury market — is supposed to go on sale in 2012, with a base sticker price of around $50,000. And they are targeting annual sales of the Model S to be 20,000 units.
The Model S is pretty much the whole reason the company got that $465 million loan from the Department of Energy.
But… they can barely sell their 2-seat roadster for $100,000. So, even if they can get production ramped up and lower their price per vehicle, how are they going to sell a 4-door sedan for half that price?
And keep in mind that they have sold only 1,063 of their roadsters in 3 years. Now they think they can sell 20,000 Model S’s a year?
Oh yeah, and there is this from the prospectus:
“We have no experience to date in high volume manufacturing of our electric vehicles.”
Let’s say they do find a receptive market of buyers for their cars. If you live in Texas, tough luck. Ditto for Kansas and other states that may prohibit Tesla from selling their cars to residents because of manufacturer/dealer laws. Where those laws are in effect, manufacturers cannot sell their cars directly to consumers — only franchised dealers can. With Tesla, there are no franchised dealers, only company-owned stores.
So far, Tesla is licensed as both a motor vehicle manufacturer and a dealer only in California, Colorado, Florida, Illinois, and Washington, and as a motor vehicle dealer in New York.
And what about service? What if you bought your car at Tesla’s Miami dealership but you live in Tallahassee? That’s not a quick trip up the block to get your car looked at, it’s a 7-hour drive.
Tesla’s solution to that will be to send a “Ranger” to service your car or have it shipped to their nearest service location. But once your car is out of warranty, you will probably have to pick up that costly bill yourself.
The biggest question mark is what Tesla will do about competition. GM will roll out the Volt at the end of the year — and while it’s not fully electric, it will have a price tag of around $40,000. The Toyota Prius is under $30,000. And the new Nissan Leaf will be priced at around $25,000 after rebates.
So can Tesla sell a “luxury” electric car for $50,000?
Probably not, when there are cheaper options available with larger dealer networks in place.
How to Make Money
Shorting Tesla stock seems to be the way to make money here. With the cash from their IPO, the company can stay afloat for at least 2 more years. But I don’t think it will take that long for the stock price to slide.
You see, the rise in price right now is mostly due to excitement over the IPO. Way more buyers than sellers. So for the next few months, the stock price could keep rising. But in about 180 days, that will dramatically change.
Tesla’s IPO was for a little over 13 million shares — only about 14% of the total number of Tesla shares out there. There are really about 91 million shares of Tesla, and none of them can be sold until 180 days after the IPO prospectus date.
If you owned a bunch of shares of a company with no real business and even bigger hurdles going forward — shares that you could dump at a tidy profit in 180 days — would you do it?
You bet you would!
The number of Tesla shares available is going to skyrocket as early investors cash out before the ship sinks.
And that is what will drive the price down… in addition to what are likely to be dismal quarterly reports.
Look to short Tesla Motors as the excitement wears off, reality sets in, and the share price starts to plateau or drop. ‘You will probably want to cover the position around mid-December, when the insiders start dumping their shares. There should be a significant surplus of sellers versus buyers at that point, and that won’t be good for the share price.
Action to take: Sell short Tesla Motors (TSLA) around its current price of $21/share. You will want to look to cover the position around mid-December, when the insiders start dumping their shares. There should be a significant surplus of sellers versus buyers at that point, and that won’t be good for the share price.[Ed. Note: Christian Hill is an investment analyst and creator of the “Trend Trader” portfolio and “The World’s Least Expensive Investment Portfolio” for ETR’s premium wealth-building service, the Liberty Street League. The Trend Trader portfolio focuses on solid, established companies poised to capitalize on big trends just around the corner. In The World’s Least Expensive Investment Portfolio, Christian “swings for the fences” by investing small amounts — no more than $100 — in stocks with the potential for huge gains. The entire portfolio won’t set you back more than $800.
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