Tesla IPO: Riddled With Risk, Hope

PALO ALTO, Calif. ( TheStreet) -- An investment in electric car maker Tesla is fraught with risks, according to the company's prospectus, which lists more than six dozen of them.

Some of the risks Tesla admitted include "very limited experience servicing our vehicles;" the sad truth that the range of those vehicles has shown a propensity to decrease with usage; a distribution network that includes just 12 stores in the U.S. and Europe, even though states including Texas and Kansas require manufacturers to deliver cars through dealerships; and the potential that customers may be in short supply and the company's track record of losses throughout its existence.

It is safe to say that investors have rarely been so systematically warned by a stock-selling company to stay away.

And yet, this is an investment based on hope -- not just for the future of a single manufacturer, but also for Wall Street to buy into a symbol of an approaching end to the world's dependence on oil, which seems to account for a particularly large share of humanity's ills.

Tesla was incorporated in 2003 and began to sell cars in 2008. It sold 1,063 models of the Tesla Roadster (above), its first car, and has since introduced two more cars including a sports version. As of March 31, this exercise had generated $148 million in revenue, $246 million in losses and an accumulated deficit of $290 million. Tesla seems to believe it can turn the tide with the introduction of a premium car, the Model S, in 2012.

The picture is not entirely negative. One positive is that the company has agreed to deals with some prestigious partners. Daimler AG, which has selected Tesla to supply 1,500 battery packs and chargers and to assist in the development of similar products for different vehicles. Additionally, a Daimler affiliate holds more than 5% of Tesla's outstanding capital stock.

Meanwhile, Toyota ( TM) has agreed to buy $50 million worth of Tesla stock at the IPO price, to cooperate on the development of electric vehicles, to assist in development of the Model S, and to sell Tesla the NUMMI plant in Fremont, Calif., which it formerly operated in partnership with General Motors, for about $42 million. It remains unclear whether this last arrangement represents a curse or a blessing.

Perhaps the most committed partner is the U.S. Department of Energy, which has agreed to a $465 million long-term loan to Tesla, which has so far drawn about $45 million. Additionally, California has authorized $31 million in tax incentives. So believers clearly exist; the question is whether their belief is justified by analysis or by hope.

The IPO, expected next week, and subsequent trading should provide a glimpse into how much of the Tesla story the public is buying. Tesla said this week that it hopes to raise about $185 million, up from its previous expectation of $100 million. The company will sell 11.1 million shares for $14 to $16 each. After the sale, executives, directors and associates will own between 56% and 58% of the stock.

The risks trouble experts like consultant Joe Phillippi of AutoTrends Consulting and John O'Dell, senior editor of GreenCarAdvisor.com.

"This company hasn't made any money yet," Phillippi said. "Everything is on the come, and it is hinged on launching the Model S, and there is talk about selling it for $40,000. Also, they are building in the UAW facility in Fremont, which has a lot of people scratching their heads, including me, because it involves the cost of dealing with UAW labor. The plant has had a troubled history, at least in recent years."

However, "a lot of people believe in green, and they will be interested in this stock," Phillippi said. "So if they can bring this car to market at the target price, on time, at a requisite level of durability and quality, they will have a chance."

Said O'Dell: "If investors embrace the $14 to $15 a share price that the underwriters have set, it will been seen by many as a vote of confidence for a company that has so far failed to post a profit and that still faces many hurdles on its way to becoming a full-fledged automaker." But the $185 million is "a drop in the bucket" of the company's needs, he said.

For its part, Tesla said the competition from the major manufacturers is tough but not insurmountable. Sure, GM and Toyota have each invested over $1 billion in electric cars; Nissan is developing the fully electric Nissan Leaf, Ford ( F) plans to introduce an electric vehicle in 2011 and most others are in the game.

But many of them have limited electric powertrain experience, have faced financial pressures that limit their commitment to electric cars, and seem committed to hybrid vehicles, "a transitional technology" that still involves burning gasoline.

Said hopeful Tesla: "Our proprietary electric powertrain system will enable us to design and develop zero emission vehicles that overcome the design, styling and performance issues that have historically limited broad consumer adoption of electric vehicles."

-- Written by Ted Reed in Charlotte, N.C.

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