It's an impressive milestone, and the company deserves big props: Tesla Motors (NAS: TSLA) delivered the first examples of its Model S sedan to customers this week, a bit ahead of the schedule announced months ago by CEO Elon Musk.

This is a big achievement. From the massive production investments needed to the arcane morass of regulatory hurdles that need to be met around the world, the business of making cars is one of the hardest for a newcomer -- even a smart, well-financed newcomer -- to enter. That Tesla has come this far (and that it has thousands of orders in hand) is most impressive.

But there's still a big question looming over the company, and it's one that makes me very leery of Tesla as an investment.


What happens next?
Here's the big question: After the 10,000 or so true believers who have put down deposits on a Model S get their cars, who will step up to buy? Or more to the point, how many will?

So far, electric cars haven't exactly taken the world by storm. Despite great marketing, a mass-market price, and a global brand name known for quality, Nissan sold fewer than 10,000 examples of its all-electric Leaf last year. General Motors' (NYS: GM) Chevy Volt was acclaimed by critics and came with range comparable to an ordinary gas-powered car, thanks to its gas-fueled on-board generator, but couldn't even break 8,000 sold.

The Model S is a different proposition from those two cars, but that's both a plus and a minus. On the one hand, the EPA says that a Model S equipped with Tesla's top-of-the-line 85-kWh battery pack has a range of 265 miles, far beyond any other mass-market electric car. (For comparison, the Leaf's EPA-rated range is 73 miles, and Ford's (NYS: F) Focus Electric gets 76.)

On the other hand, there's a pretty simple equation in the electric car business: Range costs money. In the Model S's case, you'll pay big. Pricing for the 85-kWh variant of the Model S starts at $69,900 (after a $7,500 federal tax credit), nearly double what you'd pay for a Leaf. That's comparable to a loaded BMW 5-Series or Mercedes-Benz E-Class, and that's before you start adding options to the Model S, which can drive the price up to within spitting distance of six figures.

An expensive proposition for an unproven car
To be fair, the Model S is -- at least on paper -- plausible competitor for an E-Class or a Lexus LS. It's big and roomy, beautifully styled, and comes with a well-trimmed interior loaded with high-tech touches centered around a huge 17-inch NVIDIA (NAS: NVDA) powered touchscreen.

But will it sell, once the early adopter types have their cars? Tesla plans to deliver about 5,300 cars this year and hopes to deliver 20,000 more next year and 35,000 more in 2014. That would require about 15,000 new sales by the end of next year, for starters. Is that doable?

Musk and his team clearly think so, and many analysts are bullish on his chances. I'm still skeptical. Even if a substantial market exists for the car beyond its fan base -- a big if -- the car itself is unproven, as is Tesla itself. How well will the Model S hold up in the real world, in Phoenix summers and Minnesota winters? Will it deliver reliability good enough to persuade people who now own a Lexus or a Mercedes to take a chance on a new brand?

It might. But I'm not ready to bet on it.

Building a great car is a lot harder than it looks
Here's the thing that a lot of Tesla fans fail to appreciate: It's really hard to make a car that can compete with the global giants, especially with Mercedes or BMW or Lexus. Just ask General Motors, a company with huge teams of experienced engineers and vast global resources, and a famous luxury brand, Cadillac, that is only now starting to get close to that level. For that matter, just ask Toyota (NYS: TM) , which spent a fortune establishing Lexus as a credible competitor on that level two decades ago.

I think a lot of the bullish analysts -- and investors -- are looking at Tesla as a tech company, not as an automaker. As a tech firm, Tesla looks great. It's got the best range in the business (for the moment), great buzz, money in the bank, and a clear route to profitability.

But as an automaker, Tesla's got a lot to prove. And should it prove successful, there will be some giant competitors looming. If there turns out to be a market for a $70,000 electric car, you can bet that BMW and Ford and Nissan and other big names will enter it in a hurry, and their engineering resources and economies of scale (not to mention their dealer networks) dwarf anything Tesla will be able to muster.

That's why, even as I admire Tesla's achievements to date, I'm not high on its chances of long-term success. But while Tesla Motors is a recommendation of the Fool's Rule Breakers newsletter service, there's a different multibagger that has the growth-stock service's attention these days. Find out what that stock is with a free report.

The article The Big Question Facing Tesla Motors originally appeared on Fool.com.

Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors, Ford Motor, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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Matt Camp

Very well-written, unique positions on Tesla cautious optimism. My more rational side would have to agree with you as far as betting the 401k on Tesla's success or failure long term. However, my more nuanced, youthful optimism, patiently awaiting the arrival of a market-shiting company that "gets it," simply can't get over Tesla. I've been a car-o-phile all my life, and haven't always scolfed at the notion of electric cars, let alone one's formed on the ethos of performance, luxury and ground-breaking. That was before I was introduced to this wonderful company and techno-pioneer Elon Musk. While the Roadster was itself very impressive and more than I expected, it was just a Tesla-badged, electric Lotus Elise, repleat with comparable performance across the board. Nothing to scolf at, but it clearly had a limited scope both in terms of price and practicality. All that changed when I was flying back from London in May of 2008 and panned through the latest issue of UK's Top Gear magazine. There in the autoshow section, my eye was drawn to what looked to me like a cross between a Maserati Quatroportte, Jaguar XF and an Aston Martin DB9. One of the most beautiful sedans I had ever seen at glance, I noticed the now-familiar Tesla logo, and immediately let out a collective "YES." From the moment I heard of Tesla the company, I had only mild enthusiasm about its long-term potential given that it was mostly a niche-market, kit-modified esque sports car brand. How great it is to be proven short sighted. A beautiful, price-competitive premium sedan with a game-changing platform was exactly what a company of this nature would need to succeed in the mass market. Since that day, everything has fallen in line with financing, production, and scheduling, with the Model S even improving its jaw-dropping good looks. Bottom line, this company should succeed in the short and long term simply because the premium/luxury auto market is one that thrives on several key factors: 1) Performance 2) Style and 3) Exclusivity. A fourth sub point at the under 6 figure market would certainly be price, and given this, Tesla is perfectly positioned. In a world where who has the newest and most compelling toy to show off is paramount, the Model S should find no problem carving out a niche among the well to do. In addition, the price point actually makes everything you receive with this car a practical screaming value. The one big question that remains, as stated in the article, is whether or not the reliability of this iPhone-on-Wheels can stand up to the demands of mulitiple, challenging environments and neglectant owners. My indications from the history of the company, the quality of their engineers, and their practical due dilegence, lead me to say yes. As strong as the domestic sales are looking for the Model S and upcoming Model X, most haven't even factored in the demand from Europe and Asia where efficiency and luxury both carry a higher premium.

June 24 2012 at 3:29 PM Report abuse rate up rate down Reply
philblock

Growing an apple is a lot different than growing a lemon. I would like to see the technical specifications of the Model S. Who is making the mystical batteries that can power the Model S 300 miles? Is that 300 miles on a straight road with no wind, no hills, no curves, no starting and stopping, and at one constant speed (and at what speed)? Does it include passengers, and if so, how many? Is there AC in the car--(heating and cooling)? And last, but not least, how does it compare with an ICE with identical equipment?
Is this another 1600s Tulip mania--(Tesla mania). I love EVs, but Fuel Cell powered, not powered with rechargeable batteries and hype..

June 23 2012 at 2:17 AM Report abuse rate up rate down Reply
Straight Talk

People said exactly the same things about Apple 10 years ago. Anyone talked of an ecosystem around mobile phone was deemed living in fantasy.

June 22 2012 at 2:48 PM Report abuse rate up rate down Reply