Tesla attracts a growing array of car buyers and stockholders, but can it scale up?

It only took one drive in a friend's Tesla Model S to convince Hollywood star Ashton Kutcher that he needed one, too.

"I bought the car the next day," he said in an interview with ClimateWire.

"I can drive the Tesla S, and I don't have to give up any of the luxuries that I had in my gas car," added Kutcher, who recently ditched his Lexus Hybrid. "In fact, I have the additional luxury that I don't have to pay for gas anymore."

Kutcher has no corporate affiliation with Tesla Motors. "I'm just a super fan," he said. Which makes him one of many consumers to have been won over by the performance and styling of the all-electric Model S. The actor, who has become increasingly involved in the finance world, praised the Tesla sedan's sports-car feel, roomy interior design and intelligent wireless software updates.

"I feel like this is one of the first cars that has the capacity to become more valuable over time," he said. "As the software starts to update within the vehicle, the car is going to get better."


Impressed with his new electric vehicle (EV), Kutcher bought stock in Tesla Motors. That turned out to be a wise move. Tesla shares soared following its second-quarter earnings call Wednesday and were up nearly 18 percent to $153 by market close Friday. Year to date, Tesla's stock has more than quadrupled.

Tesla's visibility has also grown exponentially. There are now more than 13,000 Model S customer vehicles on the road in North America. California leads the market, but deliveries outside the Golden State are growing at a rapid pace. Last week, the company opened a shiny new Tesla gallery at the Westfield Montgomery Mall in Bethesda, Md., and delivered the first Model S vehicles to customers in Europe.

"What continues to work for us is, in terms of exciting the public, is getting butts in seats, as it were," said Diarmuid O'Connell, vice president of business development at Tesla Motors, on a recent call with reporters. That approach, at least, worked for Kutcher.

2 new models coming

At the surface, the outlook for Tesla is rosy. While the EV maker officially posted a net loss of $30.5 million last quarter, it recorded an operating profit of $26.3 million, far surpassing an expected $18.9 million loss. The second quarter also saw record sales of 5,150 Model S vehicles, beating the company's target to sell 4,500 units.

In addition, Tesla raised $1 billion in capital, paid off its loan to the Department of Energy in May and grew its cash balance to almost $750 million. The company is now claiming a gross margin of 22 percent on the vehicles it makes. Musk said he believes the company will hold onto 25 percent of the revenue it generates by the end of the year.

But while the roughly $70,000 Model S boasts an industry-leading 265-mile range, it still shares some of the drawbacks that plague other EVs, including a high price tag and long charging times. There's also a general unfamiliarity with the technology, which was reflected in a damning review of the Tesla and its Supercharger network published earlier this year by The New York Times (ClimateWire, Feb 13).

While demand for the high-end Model S remains strong, these limiting factors could stymie Tesla's plans to branch out to the mass market. Scaling up is relevant not only to Tesla as a growing company, but also to the climate. EVs can significantly reduce carbon pollution in the passenger car sector, which accounts for 18 percent of all U.S. greenhouse gas emissions. The cleaner the power grid gets with the adoption of renewable energy and natural gas, the more environmentally friendly EVs will become.

Emissions benefits were one of Kutcher's motivations for buying the car. "I care very much about climate change," said the actor. "I really don't think what we're doing to the environment is good, and I think that we're going to pay for it if we don't do something about it."

CEO Elon Musk has set ambitious plans to scale up production of Tesla's zero-emissions vehicles. The company will start delivering the electric Model X SUV in late 2014 and plans to release a third-generation EV with at least a 200-mile range at the $35,000 price point in 2017.

"I feel pretty good about it. There's a huge amount of work, but no miracles required," the charismatic entrepreneur said on a call last week with reporters and investors.

Is a mass market there?

Musk has set the long-term goal to produce 500,000 units at Tesla's Nummi plant Fremont, Calif. But Kevin See, senior research analyst at the Boston-based firm Lux Research, warns that getting there could be a bumpy road.

"In the short term, [Tesla's] got a specialty market, and they're gaining some traction there," he said. "But when you make the growth plans so aggressive, and if your target really is the mass market, that's a whole different ballgame -- because at some point, you do run out of early adopters and that mass market certainly isn't ready for EVs, and I'd argue it's still going to be a while before they are."

In addition, there are logistical barriers to growing the company. To shift from making a few 100 vehicles per day to an order of magnitude more while maintaining a high level of quality and keeping costs low is no small feat, said See.

Sourcing materials will be a challenge, too. Production of the Model S is already gridlocked due to supply chain constraints. According to Musk, 5 percent of Tesla suppliers will have difficulty ramping up production, and 1 percent simply can't.

Then there are questions of whether or not Tesla has the cash flow it needs to grow its Model S business and launch the Model X and a Gen III mass-produced vehicle, as well as expand its Supercharger network and expand operations in both Europe and China over the coming year. Meanwhile, federal and state subsidies that have benefited Tesla are winding down.

Last quarter, Tesla reported earning $51 million from California's Zero-Emission Vehicle (ZEV) credits, down from $68 million in the first quarter. Automakers that don't offer electric vehicles pay Tesla for credits in order to comply with the state's ZEV mandate. Last quarter, Tesla also received $18 million in "other regulatory credits."

"[The credits] attach a value to this technology that the market isn't putting into the technology at the moment. So it's a bit of an enabler, but it's by no means intended to be something that sustains a company," said Nick Nigro, senior manager of transportation initiatives at the Center for Climate and Energy Solutions. "Any company is going to have to be able to make money on price, not on some government credit."

A forward path

Some financial analysts have been wary of Tesla's growth rate. Patrick Archambault of Goldman Sachs pegs the company at a conservative target price of $95 per share. That estimate, which is well below Tesla's current share value, rests on a midrange view that Tesla will sell 150,000 of its vehicles by 2018.

Dan Galves of Deutsche Bank is much more bullish. As Tesla expands its reach within the United States and begins to sell in Europe and China, he believes the company can easily sell 40,000 units of the Model S by late 2014. Tesla is expected to sell 21,000 units in 2013.

Galves calculates that, moving 40,000 units next year at an expected 25 percent gross margin, Tesla could see $900,000 million in gross profit, while the company's total expenses next year will be $570 million.

"We think that they have enough cash now, combined with our view they will have positive cash flow over the next few years, that they'll be able to build out the Supercharger network in the U.S. and Europe, expand to China and fully develop the Gen III vehicle," Galves said.

The company will also be able to cut costs as it widens its supplier base. Galves predicts that the cost of producing a Tesla vehicle could be on par with that of a comparable internal-combustion engine vehicle as soon as 2018.

"We've been pretty bullish on EVs theoretically for a long time. We don't expect them to become 50 percent of the market anytime soon, but we see a lot of potential for a shift," he said.

"It's not the type of thing that's going to happen overnight," he added. "But I think Tesla is on a path to displaying what the future is going to be."

'Guilt-free acceleration'

For Frank Yeary, director of Intel Corp. and chairman of both CamberView Partners and the tech startup Level Money, there's no question that his Model S outperforms its gasoline-powered competitors.

"When you've spent your life driving regular combustion-engine cars and then you get behind the wheel of a Tesla, it doesn't feel like it's a modest improvement in the driver's experience; it feels like it's an almost revolutionary improvement in the driving experience," he said.

"Part of it is the actual experience, and part of it is the feeling like you've joined a really cool, useful movement or club that you don't get with any other car, or you don't get to the same extent," Yeary added.

In conjunction with buying a Model S, Yeary added a solar system to his California home, which allows him to use next to no energy from the grid. "I feel like I have totally guilt-free acceleration in this car," he said.

Model S fans like Yeary and Kutcher see their high-priced purchases driving innovation that will help Tesla roll out a broader, cheaper base of products. Doubts being spread about the technology and the company are viewed as speed bumps, not roadblocks.

"EVs get held to a higher standard. They just do. And they're going to," said Kutcher.

Steve Jobs faced similar condemnations when he launched the Macintosh computer, said Kutcher, who plays Jobs in his next movie. But computing pioneer Alan Kay pointed out to Jobs at the time that harsh criticism proved his product was worthy.

"And I think the same goes for the Tesla," said Kutcher. "I think Elon made an electric car that's good enough to actually criticize. And they will."

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