Tesla Motors ( TSLA) went public last June in one of the few IPOs of the year. It had the support of high-profile underwriters Goldman Sachs ( GS), Morgan Stanley ( MS), JP Morgan ( JPM), and Deutsche Bank ( DB), as well as many well-known Silicon Valley venture capitalists. It priced at $17, the top end of its range, and soared 41% on its first day of trading. It's still trading over 24% above its IPO price three months later. The company has done a great job of funding themselves. Its IPO raised $250 million. It also received a $465 million loan from a Department of Energy (DOE). But they need it. Since inception, Tesla has lost $300 million. There are generally two types of Tesla investors: ones of love the company and ones who hate it. Tesla bulls point to electric cars being the future and Tesla sporting the biggest brand within that space. They are most excited about Tesla's planned second car -- the Model S sedan which is scheduled to ship in 2012. They argue that Tesla doesn't have to sell many units to make a lot of money. They also proudly point out that Tesla has struck important partnerships with Daimler ( DDAIF) and Toyota ( TM). Tesla bears point to how Tesla keeps losing money, how further capital needs for the company are under-estimated, and the upcoming IPO lock-up expiration in December as a potential weight on the stock price. Flashy Tesla CEO Elon Musk has also a lightning rod for criticism. I have a short position in Tesla owing to the reasons cited above and what I perceive of as poor corporate governance structures in place for a public company. I spoke last month to Eric Noble and Mike Dovorany of The CarLab, an Orange, CA-based auto consultancy. They have recently expressed publicly critical comments about Tesla's currently planned Model S. Here's an excerpt from the interview: Jackson: You've said publicly that it will take Tesla $1 billion to develop the Model S. Noble: We believe that it would take an OEM (e.g., Toyota, GM) $500 million to $700 million to design a new car. That's conservative. For a new company like Tesla doing the Model S as it's been most recently shown, we think they will need $1 billion -- but that's before ER&D on the alternative power train (where the electric battery is).
This means that Tesla will likely need even more capital -- maybe $1.2 billion to $1.4 billion in total cumulative costs -- to get this to market. Jackson: So, they're going to have to raise a lot more money in the public markets. Noble: One would think. Jackson: Tesla has said that it will sell its Model S for a base price of $50,000. Is that realistic based on your experience? Noble: No, and here's why. The Model S sedan is basically a very similar car in size and specs to an Audi A8. Audi sells the A8 for around $80,000 base. Now, Audi and parent company VW are notorious for managing their supply chain very well and even they do not make great margins on the A8. They just don't sell that many units of this car at this price point. Luxury OEMs tend to make their money on midsize and entry-level luxury cars, not the large sedans, which mostly exist to halo the brand. So, we know that Tesla is unlikely -- for the first car it's manufacturing itself, because recall that Lotus manufactures the Roadster -- to be able to do it cheaper than what Audi does to produce an $80,000 car. But, then, remember that the A8 doesn't have an electric battery. Conservatively, the battery will likely cost another $30,000 -- and that's just the cost. You do the math and you get to a base price of $110,000 Model S with almost no margin -- and that's assuming they can do it as cheaply as Audi. Jackson: Tesla says they will sell 20,000 Model S cars a year. Noble: I just don't think that's realistic at that higher price. Jackson: How do you view Tesla's deals with Daimler and Toyota? Don't they suggest Tesla has something those guys are interested in? Noble: It's pretty common in the auto industry for the big guys do these kinds of partnerships. They don't have to do much and they get a window seat to see if the start-up is doing anything interesting. From the perspective of the start-up, they're desperate for capital and credibility that these partnerships bring. In the case of Tesla, these announcements also came out ahead of their IPO (in June) which helped them. From our perspective, these big guys haven't made any truly substantial commitments to Tesla. They issued a joint press release. Jackson: Plus, Toyota also got to sell their stake in the NUMMI plant to Tesla. Noble: Yes. In our view, Toyota unloaded an unsellable asset to Tesla shareholders for about one-third of what it would have likely cost Toyota to shut the plant down. Even though Toyota production was exiting the plant, a large facility like that costs them money as long as it's on their books. There's also the issue of the NUMMI plant being unionized but it's unclear how that will affect Tesla. When you look at everything around this deal, Toyota invested $50 million in pre-IPO Tesla stock and got to sell the NUMMI plant for $42 million and associated parts and equipment for another $15 million. Seems like a good deal for Toyota from what we can see. Jackson: So, you're bearish on Tesla's future. Noble: It's already obvious to us that this dog doesn't hunt. Investors just don't understand this yet.