Tesla’s rise has even biggest fans looking for feet of clay

By Neal E. Boudette, New York Times News Service

Wednesday, April 12, 2017 | 2 a.m.

In the past four weeks, exuberant investors have driven up the share price of Tesla, putting the upstart in the league of car companies that have been in the business for a century.

But there are others who think Tesla, for all its potential, has become an overpriced investment — and something of a risky play in the near or medium term, given the challenges of turning battery-powered cars into mass-market products.

Among the skeptics are some of Tesla’s biggest fans.

Take Dennis Pascual, a tech industry consultant in Long Beach, California, and owner of two Teslas — a Model S sedan and a two-seat Roadster, the first car Tesla put on the road. He is such a fan, in fact, that he has put down deposits to buy two Model 3 compacts once Tesla starts making the car this year.

He also owns some Tesla stock but is not about to buy more.

“It’s a little pricey for me to jump back in,” he said, speaking by phone from his Model S. “Right now, I think we’re in a hold.”

Moreover, he worries about Tesla’s ability to carry out the bold expansion plans it has for this year and next. Tesla’s high-profile chief executive, Elon Musk, has said the company expects to begin production this summer on its first mass-market offering, the Model 3, ramping up to 5,000 cars a month by the end of the year and driving output to several hundred thousand cars over the course of 2018.

“They really need to deliver, and that has me concerned,” Pascual, who has worked at startup companies and has years of experience in the technology business. “I’m bullish long term, but yes, I’m worried. I’m always worried about companies executing.”

Tesla’s market surge has been extraordinary. Since March 13, its shares have risen 25 percent, in a period when the Standard & Poor’s 500-stock index has declined slightly.

Along the way, the market value of Tesla, which sold fewer than 80,000 cars last year and does not yet generate steady profits, has grown to $50 billion — roughly equal to that of General Motors, which sold more than 9.8 million vehicles worldwide and earned $9.4 billion. (On Tuesday, Tesla closed at $308.71, a decline of 1.2 percent, pushing it slightly below GM in market capitalization a day after surpassing it.)

That Tesla and GM are comparably valued is “totally inexplicable,” Michael J. Jackson, the chief executive of the dealership chain AutoNation, said Tuesday at an auto-industry conference in New York. He added that Tesla “is either one of the great Ponzi schemes of all time” or will somehow work out for investors.

The run-up was fueled in part by some encouraging signs that Tesla’s Model 3 is proceeding on schedule. Early this year the company began production of batteries at its gigantic new plant in Nevada, known as the Gigafactory. Then it announced that Model 3 production would start in July, despite concerns among some analysts that the debut would be delayed until late this year.

A smooth Model 3 rollout could propel Tesla to new heights. It has customer deposits of $1,000 for close to 400,000 orders of the new model, which is priced at $35,000, making it affordable to far more buyers than Tesla’s existing models, which go for $90,000 with options.

There have been other positive notes. In March, Tesla reported a loss of $121 million in the fourth quarter of 2016, but that was smaller than its loss in the same period of the previous year. And on April 2, the company announced it had delivered more than 25,000 cars and sport utility vehicles in the first quarter, a year-on-year rise of about 69 percent, prompting investors to pile into the stock.

“The market seems to be thrilled,” said David Whiston, an equity analyst at Morningstar. “The thinking seems to be that this could be the next Amazon or Apple, and people want to get in early.”

Adding to this enthusiasm seems to be a belief in Musk’s vision of the future. He is trying to revolutionize the auto industry with Tesla, which has jumped ahead of traditional automakers in both battery-powered cars and self-driving technology. At the same time, he is promising to bring affordable renewable energy to homes with SolarCity, which merged with Tesla last year, and commercialize the heavens with SpaceX, a separate company he founded.

Tesla, in Musk’s view, is more than a carmaker. It is leading the shift to renewable energy — on the road and at home.

While Musk’s vision has captured the imagination of both car buyers and investors, the company’s financial situation is less compelling. Tesla has reported losses in each of the past five years and must invest heavily to achieve his goals. It had $3.4 billion in cash at the end of 2016 but some $7 billion in debt after the SolarCity acquisition. It has debt payments coming due in 2018, 2019 and 2021. Problems or delays in Model 3 production could make it harder to meet its obligations.

Tesla soon will bolster its coffers by raising an additional $1 billion through offerings of stock and debt. Last month, it struck a deal in which a Chinese internet giant, Tencent Holdings, acquired a 5 percent stake.

“Right now, nobody seems to care about balance-sheet risk,” Whiston said. “The market doesn’t seem to be concerned about cash-flow risk. People are looking at the potential, and the old-fashioned analysis of fundamentals aren’t seen as important.”

Another question overshadowed by Tesla’s stock surge is whether the company can make the big leap to making, shipping, selling and servicing a half a million cars a year — a fivefold increase in production of cars that are made out of thousands of parts and components.

“All you need is a problem with one part to delay the Model 3,” said Karl Brauer, a senior editor at Kelley Blue Book.

Producing a half a million cars a year in one plant will not be easy even without such problems. Other car plants in the United States typically make only 200,000 to 300,000 vehicles a year.

Pete Cordaro, the owner of a vending-machine company in Connellsville, Pennsylvania, drives a 2015 Model S and loves the car. Cordaro is such a fan, in fact, that he has put down deposits to buy two Model 3s once they are available.

But the stock? He is not sold on it. He said he knew well from his own business how important a sound financial footing was.

“I think there’s too much enthusiasm in the market like with any growth company,” Cordaro said. “I think it’s a bubble.”