Why I Did Not Buy [a] Tesla [Stock] This Week

As it happens, I am, more or less, in the market for a car.  Our son commutes to an urban private school in our oldest car, a Volvo SUV (averaging sixteen or seventeen miles per gallon); I’m a little tired of the manual transmission in my Boxster; a little tired of its small size (it’s a little cramped, even for my five-ten); a little tired of a car with only two seats.  I drove it on tracks (e.g., the incomparable Barber Motorsports Park) at Porsche club events enough times that I reached a saturation point.  Bored.  Sort of a “been there, done that” feeling.  Professional race car drivers must surely be part hamster (around and around and around and….).  My wife rarely drives the Boxster.  The other vehicle is a Honda pickup truck with a little body damage and the slowest steering I’ve ever seen on a road vehicle — it’s more like a ship’s wheel on a supertanker.  My wife and son will drive it, but neither likes it.

So, this weekend, after mountain biking with a friend, we were driving home and speaking of cars and oil and energy and such (techie guy stuff, yeah — he’s an engineer), and I mentioned this automotive quandary and, in context, that I’d read that a Tesla Model S battery pack stores enough electricity to run the average house for three-and-a-half days.  Yes, days, not hours.  Combine that energy storage with solar recharging, and you’re off the electrical grid, maybe forever.

And a light bulb (hah!) went off.  Why not a Tesla Model S?  Yes, they’re expensive, but you’ll never buy gasoline again, they require virtually no maintenance (no oil changes, no transmission fluid changes, no power steering fluid, no spark plugs, and, because of regenerative braking, no brake pads for 100,000 miles).  (No, a Tesla Roadster, he said (he’s sort of a sports car guy)).  Well, first, Tesla no longer manufactures that model (they make only the Model S), and second, the Roadster was just an electrified Lotus Elise, and I would not pay fifty cents for a Lotus Elise, having climbed across the gunwales of one and sat in it for thirty seconds and rejected it before buying the Boxster.  I’ve seen creative kids build more substantial cars out of cardboard boxes.

But the Model S differs from a Tesla Roadster as a Trabant differs from a Mercedes-Benz S550.  The Tesla Model S, if the automotive press can be believed, may be the best luxury car in the world.  Motor Trend Car of the Year for 2013.  Heavy.  Substantial.  Safe (the major factor to my wife).  Consumer Reports considers it the best car they have ever tested.  Highest marks for safety in its class, which includes the BMW 7-series and the S-Class Mercedes, both of which it outsold last year.

Back home, I mentioned this epiphany to my wife.  We proceeded through a mildly-enthusiastic period, during which I filled in a form for a test drive on Tesla’s website.  A couple of hours later, a nice-sounding fellow from Tesla in Palo Alto called me back and left a message on my cell phone.  As I write this, I haven’t yet called him back.

Tesla owners report few quibbles.  Sometimes the automatic door handles don’t pop out when commanded.  The interior (designed for a sleek contemporary Apple-ish look?) includes no storage bins, a minimalist glovebox, and the rear seats have no cupholders and no fold-down armrest.  Nevertheless, owners seem to love the car.  Quality, safety, reliability, even range (real-world range is about two hundred miles, though Tesla claims 265 for the most expensive package) seem at least adequate for a large, expensive luxury car.

But one issue has kept me from calling back for that test drive:  what if Tesla doesn’t survive?

Tesla faces numerous obstacles.  It offers only one model.  According to some analysts (see link here), sales in the U.S. appear to be declining as potential buyers wait for promised improvements to the Model S and as others wait for the new Model X or the promised Model E, the affordable Tesla.  Tesla also faces supply constraints, which led it to plan for and announce that it will build the world’s largest lithium-ion battery plant.  That undertaking itself poses enormous risks and challenges:  Tesla doesn’t own the technology; Tesla has never made a battery; Tesla’s sales must increase by more then ten-fold to justify the cost of the plant; battery margins may not decline; Tesla hasn’t yet selected the plant site, let alone conducted an Environmental Impact Assessment or hired and trained workers; another battery technology could disrupt Tesla’s plans.  See article here.  These issues aren’t really different in substance, mutatis mutandis, from the issues that have crashed other automobile startups, from Tucker to DeLorean to Sterling to Fisker.  It’s the chicken-or-the-egg problem.  We could sell more cars if we had the capacity, and if we had the capacity….  Automobile manufacturing is capital-intensive even if you don’t have to build a new battery factory in order to have the capacity to build more cars.  A risk-ratcheting effect applies which is unique to Tesla.

Maybe it’s cool to have a DeLorean in your garage today, but when it needs parts, you can’t drop down to Autozone.  This problem looms a million times worse for Tesla owners, who own not simply a new car from a new manufacturer, but a new, one-off technology.  A good shop could probably drop a small-block Chevrolet engine into that DeLorean.  If battery technology bypasses Tesla, if they can’t get the plant out of the ground and producing batteries soon enough, if they go bankrupt because sales revenues don’t meet projections . . . when that battery dies, the Tesla will never be anything but an expensive paperweight.

These considerations did not occur to me in a car buyer’s vacuum.  As a speculator, I already owned a few puts on Tesla.

Like its Model S, Tesla stock is expensive.  The price to earnings ratio, the traditional measure used to determine whether a stock’s price is reasonable, even after a twenty-point drop from the all-time high, remains non-meaningful, or impossible to calculate:  the company reported a net loss of sixty-two cents per share for 2013.  Nevertheless, the share price increased by 616 per cent from March of 2013 to March of this year, and the stock is up over 1,300 per cent since the IPO.  Tesla’s market cap sits at around $30 billion.  BMW’s market cap is just over $70 billion.  Tesla projects it will sell 35,000 cars this year.  BMW will sell over two million cars in 2014.  Tesla’s stock chart appears to have printed what technical traders call an “exhaustion gap” above $215 per share (the stock is now around $239), and the stock recently fell below an important trendline.

So instead of buying a Tesla Model S, I doubled my put position (And of course, the stock went up the next morning and I got stopped out of the position.  So it goes.).

I hope Tesla survives, because the United States needs another successful auto manufacturer, because the Tesla Model S is the most intensively-U.S.-sourced car in the world, and because, as Road & Track wrote, “[f]or the first time since automobiles had fins, the world stands in awe of a car from the United States,” and because I’d really like to own a Model S, and I wouldn’t mind replacing the Volvo with a Model X.

But history, and, ironically, even technology, may not be on Tesla’s side.

P.S.  Legendary investor Jeremy Grantham is on board with Tesla — the car, if not the stock.  See Grantham’s recounting of a ride in a friend’s Tesla here.