NEW YORK ( TheStreet) -- Yesterday I read the transcript of the third-quarter conference call for Tesla Motors ( TSLA - Get Report) and was shocked by the hubris of this quote from Elon Musk, Tesla's chairman, CEO and product architect: "I feel Tesla was really kind of past the point of high risk. Several months ago, I said I thought that the coming several months would be really the test for Tesla. And it's the classic phrase of, going through the valley of death, and I feel as that we are through that valley at this point. I've spent over 30 years guiding entrepreneurs through the valley of death. It's an exhilarating, treacherous and often terrifying period in the life of every business that begins with the signing of incorporation documents and ends when cumulative cash flow turns positive. Most companies that enter the valley of death never emerge. For the fortunate few that do, the hard times last longer than anyone expected. The one trait all entrepreneurs share is unbridled optimism. The three traits all survivors share are determination, focus and fiscal restraint. While I hate to burst young Mr. Musk's bubble, Tesla has just reached the product launch phase and is nowhere near the bottom of the valley of death.
At the risk of sounding cruel, Tesla was a bug in search of a windshield on Sept. 30. Its working capital was about $90 million in the red, and its stockholders were under water to the tune of $28 million. The only thing that saved Tesla from pre-election disaster was a last-minute offering that scored $222 million in new investor cash in early October. Tesla's stockholders may have been blissfully unaware of their risk, but its management knows how close the headsman's ax came before they pulled working capital back up to a lofty $1.18 per share and equity up to a whopping $1.71 per share. At yesterday's closing price of $31.15 per share, Tesla's market capitalization is 94.5% blue sky, the imputed value of an electric-vehicle technology that promises a greener future for all of us. The problem is that the claimed environmental benefits of electric drive are a bald-faced lie that ignores the undisputable reality that electric vehicles create more pollution in their manufacture than they save in their operation. Last fall, researchers from Carnegie Mellon University published an exhaustive study titled "Valuation of plug-in vehicle life-cycle air emissions and oil displacement benefits" in the Proceedings of the National Academy of Sciences. The study relied on The Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation Model developed by Argonne National Laboratory and compares the life-cycle emissions and costs of several vehicle drivetrain options including: A conventional vehicle, or CV, with an internal combustion engine; A Toyota ( TM) Prius-class hybrid electric vehicle, or HEV; A plug-in hybrid electric vehicle with a 20 km range, or PHEV20, like the plug-in Prius; A plug-in hybrid electric vehicle with a 60 km range, or PHEV60, like the GM ( GM) Volt; and A battery electric vehicle with a 240 km range, or BEV 240, like the basic Tesla Model S. This graph from the supporting materials shows the base-case emissions and oil premium costs for each class of vehicle. The important thing to keep in mind when you look at the graph is that the blue impacts arise during the manufacturing process while the black, yellow and red impacts arise from operating the vehicle over its useful life. The blue is pollution today, while the black, yellow and red are pollution some day in the future. The supporting materials didn't include tabular data that would permit precise calculations, but it's clear that the manufacturing emissions for a basic Tesla Model S with a 40 kWh battery pack are 2.5 to 3 times the manufacturing emissions for a conventional vehicle and all the incremental emissions come from manufacturing the batteries. While life-cycle emissions are effectively a wash with a 40 kWh battery pack, increasing battery emissions by 50% for the 60 kWh battery pack, or by 112% for the 85 kWh pack, creates a pollution deficit that can never be overcome. A similar conclusion is obvious in this graph from the supporting materials that shows the net present value of lifetime vehicle ownership costs including air emissions and oil premium costs. The economic differential to the owner is about $30,000 with a 40 kWh battery pack, $40,000 with a 60 kWh pack and $50,000 with an 85 kWh pack. So the Model S is both dirtier and far more expensive. It's a one-two punch! In the minds of dreamers everywhere the answer to the emissions problem is renewables. That easy answer, however, ignores the fact that the two essential attributes for an industrial society's electric grid are reliability and stability. Since green power from renewables is intermittent and unreliable, it's no better than pouring raw sewage in a trout stream because somebody other than the power producer has to pay the cost of removing the poison of intermittency from the grid.
Even if you choose to ignore the intermittency issue, the virtue of green electrons resides in their creation rather than their use. Once green electrons exist it doesn't matter whether they power a Tesla or a toaster. One will be cleaner and the other dirtier. I've read the reviews of the Tesla Model S and have no doubt that it's a fine automobile. It is not, however, a clean automobile and pretending otherwise is deceptive. Adding renewables to the analysis merely adds another level of pollution to the power grid, a shared resource that is every bit as critical to life in an industrialized society as clean air and water. I've read several reports over the past two days about the 2,900 new Model S reservations Tesla booked in Q3. The thing they all overlooked, however, is the number of cancellations. Tesla had 11,500 reservations at the end of Q2. It booked 2,900 new reservations in Q3 and delivered 250 cars. It ended the quarter with 13,200 reservations. That number is only possible if 950 existing reservations were canceled during the quarter. A one-in-three cancellation rate in the middle of a high-profile product launch is not an encouraging sign. I'm willing to give Tesla the benefit of the doubt when it comes to reaching its production goal of 5,000 cars per quarter. But if you start with a reservation base of 13,000, deplete it by 5,000 deliveries per quarter and then replenish it by 1,750 reservations per quarter, the mathematical progression for 2013 will be as follows: Q1 -- 9,750 reservations Q2 -- 6,500 reservations Q3 -- 3,250 reservations Q4 -- zero reservations The art of investing is all about balancing upside potential against downside risk; weighing the possible against the likely. Tesla may be a fun stock for traders as the hype cycle runs its course, but with gaping holes in the environmental claims, yawning chasms in the economic claims and serious questions about the commitment of reservation holders, I don't see a reasonable balance between risk and reward.