Elon Musk Sold PayPal, Didn’t He, So We View Tesla as Takeover Candidate

Elon Musk’s latest company, SolarCity (SCTY), went public last week and staged a big first-day “pop” in spite of the fact that bankers had to trim the size of the deal and get Musk and other backers to buy stock as part of the IPO rather than selling into the deal – the more traditional approach.

So, what’s happening at Musk’s other brainchild, electric automobile manufacturer Tesla Motors (TSLA)? Investors have been on a long and bumpy road, as the company has forged ahead to make its Model S electric car a reality, and developed partnerships with Toyota (TM) and Daimler AG that have helped it produce those automobiles at a lower cost than would otherwise have been possible. Certainly, the company’s share price marks it as one of the most interesting and long-term IPO successes of the last few years, as seen in a stock chart.

TSLA Chart

TSLA data by YCharts

There are, at last, some signs that that stock price gain may be justified by more than just the conviction among investors that the great product that Tesla has created can be the foundation of a profitable company. Musk announced earlier this month that Tesla finally has become cash flow positive at the end of November, meaning that investors who have been worried that the company will struggle to finance the production of its new Model S vehicle can breathe a little easier.

TSLA Cash from Operations TTM Chart

TSLA Cash from Operations TTM data by YCharts

But being cash flow positive is only half the battle, and that won’t last for long if the company can’t boost its profit margins, as indicated in the chart below. Right now, the data suggests that every vehicle it manages to sell is being sold at a loss.

TSLA Gross Profit Margin Quarterly Chart

TSLA Gross Profit Margin Quarterly data by YCharts

At the beginning of the fourth quarter, Tesla had said it was producing only about five cars a week at its California factory; that figure now is close to 200 a week. That’s a big improvement over the 268 it sold during all of the third quarter, but still only half of its target rate. Tesla needs to hit that target, and do so at its new, higher prices, if it is to continue developing new models, like the electric Model X, an SUV.

Tesla – in contrast to cash-strapped, struggling Fisker Automotive, its rival – has managed to take the century-old automotive manufacturing business into the 21st century, and this year the Model S won Motor Trend’s coveted “Car of the Year” award. Ultimately, however, it may end up being more attractive as a takeover candidate than as an investment in its own right. Given that virtually every major automaker – including Ford (F) and General Motors (GM) -- wants to find a way to nail down the growing market for electric vehicles, Tesla’s ability to win brand recognition and consumer loyalty will make it a great acquisition target. Musk, co-founder of one of PayPal’s two original companies, has already shown that he is willing to accept the proverbial bird in the hand rather than hold out for something bigger and better, but uncertain: PayPal was sold to eBay (EBAY) for $1.5 billion more than a decade ago, and now generates about 40% of eBay’s revenues. (Musk has said he believes Tesla can succeed as an independent company.)

If you decide this is a stock you want to own as a pure play on the electric car market, be prepared for a long, winding and rather bumpy road as Tesla slowly ramps up production and battles for market share among the giants. On the other hand, to the extent that it succeeds, odds are that it will emerge as an even more alluring acquisition target for automakers worldwide – and that might be where the real value lies.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.

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