Tesla in 2013

Arguably the one and only success story in the electric vehicle game, Tesla heads into 2013, knowing it’s basically a make or break year for the company. The DOE loan recipient is on the precipice of proving all the naysayers wrong, showing that it’s possible to build a profitable company with a sustainability angle.

If Tesla succeeds, it won’t be because people care all that much about driving an EV, it’ll be because it built a well designed car for a relatively price insensitive customer who wanted to take a chance on next generation technology. But with that said, if the company can take another step toward the 2015 dream of producing a reasonably priced, mass market EV bred of great design, we’ll be getting closer to another shift in power away from fossil fuel dominance.

I’m sometimes asked what the cleantech sector needs to make it. And while a breakthrough in solar cell efficiency or a carbon tax or a battery that is a leap forward in energy density would all be wonderful, I really believe that the best near term solution would be a $100 billion dollar cleantech company with the resources to start influencing both consumers and those on capitol hill.

If you add up the market cap of Exxon-Mobil, Shell, Chevron and BP, you’ve got close to a trillion dollars in value. Tesla is a meager $4 billion but if we could start to see consistent growth in the value of cleantech companies so that the gap between their value and their fossil fuel competitors incrementally narrows, we’ll be closer to changing the world we live in.

So as we ring in the new year and handicap Tesla’s chances for further growth, let’s take a look at its challenges:

1) 20,000 Model S Sedans. It’s the magic number founder Elon Musk has continually spoken of, saying that Tesla can manufacture and deliver 20,000 luxury Model S sedans in 2013 at a gross margin of at least 20 percent. The company likely produced around 3,000 in Q4 of 2012 as it ramps production, and is at a production rate right now of 400 cars per week, according to a letter to shareholders. It’s not enough yet to get to the goal, but all signs point to the fact that the rate of production is steadily climbing.

More importantly, as more Model S sedans hit the streets there’s likely to be some market traction with more consumers trusting the technology and showing off the car to their friends. We’ve seen this even with the relatively disappointing Chevy Volt, where GM sold just under 8,000 of the plug-in hybrid in 2011 and will do around 20,000 in 2012. Also, less has been reported about the potential of Tesla to sell into the European market, but the company will have the ability to manufacture left hand drive Model S models starting in March from its Tilburg, Netherlands facility.

2) Will Tesla need to raise cash in 2013? In a December blog post John Shinal over at Marketwatch.com argued that Tesla will need additional capital to stay afloat in 2013, writing that Tesla ”will rank among the top candidates in Silicon Valley for a 2013 stock collapse, unless it receives significantly more cash next year.”

I think Shinal is overly negative here, particularly on the stock, which will get a boost if Tesla meets revenue expectations. The company had $86 million in cash and raised another $195 million in October. If Tesla can sell 20,000 Model S sedans at my own estimate of an average selling price of $65,000, it’ll generate $1.3 billion in revenue. At a conservative gross margin of 20 percent, that’s $260 million to cover operating expenses, which have run in the neighborhood of $400 million per year plus the approximate $60 million the company will need to service its DOE debt in 2013.

Unless it brings down its R&D costs or its marketing costs, it’ll lose about $200 million next year as the company sits on around $280 million in cash. But Wall Street doesn’t care about that. Wall Street will be very happy with the stable gross margin and revenue growth, which will keep the share price buoyant and make it easy for Tesla to raise cash if it comes to that.

3) The real risk for Tesla: recalls and production.  Looming VC disaster and luxury plug-in hybrid maker Fisker has faced battery recalls and crippling production delays related to supplier problems with bankrupt lithium ion battery maker A123 Systems. It’s a scary lesson for a one product company like Tesla.

Any disruption in the manufacturing of the Model S would be problematic, given the fact that expenses would run on while revenue slowed. Not to mention the fact that Tesla needs the consistent cash flow to start readying the Model X SUV for 2014. Supplier concerns are one reason the company has done so much building of parts in house. And the threat of a recall makes it unsurprising that we continue to get reports that Elon Musk is personally inspecting every Model S.

 

While risk remains for Tesla, those who are calling for the company’s collapse in 2013 are overstating the issue. If anything, I think this time next year we may be discussing Tesla’s production challenges as the company would have to figure out how to manufacture more than 20,000 Model S vehicles in 2014 with a limited production facility. And Wall Street will reward the company for doing what it has said it will do–ramp production and maintain a good margin. Which should be one tiny step toward narrowing the gap between what all of cleantech is worth and what the fossil fuel industry is valued at.

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Adam Lesser

Cleantech Curator Gigaom Research

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