Tesla: Being Cool May Not Be Enough

SMITH BRAIN TRUST — Tesla's fourth-quarter loss nearly tripled, to $320.4 million, but many investors remained besotted with the cutting-edge electric car company. Its stock has risen 16 percent since the Feb. 10 earnings announcement.

On the bright side, Tesla hit its target of 80,000 to 90,000 vehicle deliveries in 2015, and said that it would be producing its Model X SUV at a rate of nearly a thousand a week by the end of 2017. It recently announced that its Model 3, its first attempt to crack the mainstream car market, will arrive by the end of 2017, priced starting at $35,000.

Less positively, Tesla has burned through $2.9 billion in the past six quarters and has $1.2 billion left on its balance sheet, according to The Wall Street Journal. The Model X arrived behind schedule, with Tesla delivering just over 200 in the fourth quarter. More ominously, the Chevrolet Volt will beat the Model 3 to market by about a year, and cost $37,500, with similar range between charges: 200 miles. Tax credits will reduce the cost of both the Model 3 and the Volt, but Chevrolet dealers are likely to be able to offer discounts, something Tesla doesn't do.

The Bolt may not have the panache of a Tesla, but, unlike Tesla's current customers, most car consumers don't buy cars for panache, observes Brent Goldfarb, associate professor of management and entrepreneurship at the Robert H. Smith School of Business and academic director of the Dingman Center for Entrepreneurship. "For most car buyers, price is just so important, and Tesla can't compete on price."

"Tesla is moving from a very high margin part of the market to a low margin part of the market," Goldfarb continues. "Their margins on the Model 3 are going to be razor thin, or Tesla is going to be losing money. And here's the thing: The Fords and GM's of the world can afford to lose money on electric cars, because they help them meet emission standards. But Tesla can't." Tesla has been very active in trying to build self-driving vehicles, but that is also a very crowded space. Moreover, when and if the driverless revolution arrives, there may be less demand for premium vehicles like Teslas, as driving becomes commoditized, Goldfarb suggests.

So what does the future look like? Goldfarb is not bullish on Tesla. "I can see a path for Tesla to survive," he says, "but not as a mass-market producer. Maybe they become a smaller, niche, manufacturer, or they get bought by another company and become a division of that company — although then you have the problem of corporate cultures clashing."

"But the incumbent car companies have proven their ability to come out with decent electric cars," Goldfarb says — a potentially fatal development for Tesla, would-be disruptor.

In hopes that it becomes the dominant supplier of electric batteries for houses as well as cars, Tesla is also building a major factory in Nevada. But that is a long-term play that may not pan out. "I just can't imagine that based on the two products that Tesla has, and the third that they have promised, that the company is worth half of GM's market capitalization," Goldfarb says. As of this week, Tesla was valued at $22.5 billion, G.M. at $46.3 billion.