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Why Tesla Is the Next Webvan

Last June, Tesla went public at $17. Two days later, its price jumped to more than $30. Three days later, its price had dropped below $16. It's now more than $19, after its first earnings release since its IPO disclosed that it had lost a record $39 million in the quarter and $68 million in the first six months of the year.

The recent S-1 filing makes for some interesting reading on Tesla. People who now express surprise about Mark Hurd's expenses leading to his ouster at HP (HPQ) obviously weren't reading the SEC filings a year ago. I think there are even more troubling details in the Tesla filing -- especially the "risk factors" section.

Here are the main reasons why I'm short Tesla and why I think it could be the next Webvan:

  • No senior auto experience on the management team. Tesla has chosen to build out the management team without senior auto industry people (although they do have people who held junior positions at car companies). When asked about this recently, Musk defended the decision because they are trying to recreate the inefficient auto industry. Why should they listen to Detroit people?
  • Revolving door at the top. Musk is the fourth CEO in three years at Tesla. Start-ups can have their share of management drama but this company is still going through its adolescence as a company while being public. Management instability breeds more management instability.
  • CEO narcissism. Musk had a role in the recent Iron Man 2 movie, and was an inspiration for the movie's character Tony Stark. He lives in Bel Air. He's been a guest on the Stephen Colbert show and Time's list of the 100 most fascinating people. If Musk was a woman, we'd probably hear more comparisons between him and Carly Fiorina. Anytime a CEO starts to care more about his celebrity over the business, that usually suggests he's distracted from the business -- which might start to show itself in the company's operating results in the quarters to come. The company's second-quarter results were a good start to that.
  • Tesla has bet its future on its next car: The Model S. Very shortly, Tesla will stop manufacturing the Roadster. Its viability as a company will depend on its next car: The Model S. The car is a family oriented sedan and looks like a Volkswagen Passat. It hopes to start delivering the car in 2012 but it could take longer (according to their filing). There is no clear plan yet for how it will sell the car (other than through the internet and its small boutique stores in rich cities like Monaco). The Roadsters have sold only a few thousand, so Tesla will quickly have to learn how to sell its next car.
  • Tesla has no manufacturing experience as a company. Its Roadster is built entirely by Lotus -- not Tesla. The Model S will be built by Tesla and they just bought the old Toyota Nummi plant in Fremont, CA, to do this. The purchase price Tesla is paying is $42 million, which will eat up most of its available $69 million in cash.
  • Tesla has not shown it can make money. It has lost $237 million from inception through Sept. 2009. It sells an over-priced Roadster and will likely sell an over-priced sedan. The only reason the company is still in business is because of the U.S. government. At the moment, it's relying on a $465 million Department of Energy loan to exist. On one hand, I support the government offering incentives for the development of alternative energy. On the other hand, I have a problem with the government picking winners and giving generous loans to a company that has never made a dime and decided to pay its Silicon Valley millionaire CEO a total compensation package last year worth $25 million (not including money he would have made through the IPO in June). Why does Tesla deserve half a billion dollars from U.S. taxpayers? If the company would go bankrupt today without that support, how does the government justify providing that assistance?
  • Musk treats the CEO position at Tesla as a part-time job. At the moment, Musk holds three CEO positions, including Tesla's. His other focus areas are his space exploration company and his solar energy company. Maybe this flies in Silicon Valley for start-ups, but it's just not acceptable for a Nasdaq-listed company to have a part-time CEO. If Musk wants to be the CEO of Tesla because it's a great opportunity, then be the best damn CEO. If he wants to fiddle around with a space company, then he should go do that.
  • Musk should get his brother off the board and bring in some more auto industry experience. At the moment, Musk's 37-year old younger brother Kimbal sits on the Tesla board. Kimbal is a chef, with a restaurant in Boulder, CO, and a Web company. If he wasn't the CEO's brother, he likely wouldn't be on the board. He should have stepped down pre-IPO and made room for more auto industry "gray hair."
  • The bottom line is that Tesla is going to bleed cash from now until it starts selling its Model S in 2012 or later. It will need to raise money, with a high chance of launch delays. Electric cars will be the future, but I'm betting they won't be Tesla's electric cars.

    At the time of publication, Jackson held a long position in GOOG and a short position in TSLA.

    Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson

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