TechPulse 360

I don’t get it.

Tesla Motors makes the highest performing electric car on the road today. But it is spilling red ink and the prospects of a reversal are many years away.

Now it has raised the amount of money it anticipates from its IPO to $178 million, well above the original target of $100 million. The company will need a patient group of stockholders.

Battery packs for Tesla's Roadster electric sports car. Can the company turn its red ink to black in next five years?

The Palo Alto carmaker announced Tuesday it will sell 11.1 million shares to the public on June 29 for a price of between $14 and $16 a share. The offering will attract proceeds of $155 million to $178 million.

With underwriters such as Goldman Sachs, Morgan Stanley, J.P. Morgan and Deutsche Bank Securities, one would imagine the temperature of prospective stockholders has been taken. That temperature must be relatively hot considering the 78% increase in the size of the initial public offering.

But for these buyers, the bet on Tesla is anything but a sure thing. The company sold only 1,063 of its $109,000 Roadsters through March and plans to discontinue production in 2011. The car is a technical dynamo, accelerating to 60 in 3.7 seconds and traveling 236 miles between charges.

But the halt in production will leave Tesla without a vehicle until its “every-man’s” car, the Model S sedan, launches in the 2012. But even this people’s car will be geared toward buyers with real money in their pockets, limiting its market appeal. It will start at $49,900, after subtracting the $7,500 federal alternative vehicle tax credit that may or may not remain in place – well more than the $33,000 Nissan Leaf and the expected $38,000 Chevy Volt.

For some shareholders, the real bet on Tesla may be a five-year or more gamble that looks beyond the Model S. In May, the company said it will develop a third-generation electric car with a lower price than the Model S and higher volumes. The model will be built at the Fremont auto plant the company plans to buy from Toyota, but won’t be on the showroom floor for a “few years” after the introduction of the Model S. That suggests it is five years away.

Until then, company finances are a real question mark. Tesla, since its inception, has recorded revenue of $147.6 million and an accumulated loss of $290.2 million. That amounts to red ink of $273,000 a car.

In fairness, the accumulated loss includes start-up and development costs that won’t need to be repeated. So for sake of argument, assume Tesla sold half its Roadsters in 2009 (the car has been on the market for about two years and 2009 is half the period). With losses of $55.7 million in 2009, the deficit per car falls to $105,000.

So how much further will it fall with the Model S? That is a key question for investors. The company intends to make up to 20,000 Model S sedans a year. That will generate revenue of about $1 billion. If costs were to fall to $50,000 a car, the losses would also be $1 billion – breakeven.

Tesla suggests its finances may look more appealing. In a filing on Tuesday with the Securities and Exchange Commission, the company says its goal is to design a business model that can generate profits on a low volume of cars.

As if to prove the point, the company says its capital expenditures, and its research and development spending to design and build the Roadster come to $125 million, or only slightly more than the $116 million in revenue it earned if each car sold for $109,000.

And yet, Tesla hits a cautious note as well. “We believe that we will continue to incur operating and net losses each quarter until at least the time we begin significant deliveries of the Model S,” the company says in its filing.

Then it adds: “We expect the rate at which we will incur losses to increase significantly in future periods” as the company designs the Model S, opens new stores, equip its Fremont plant and expands its sales force.

For many investors, buying in to the IPO will be a leap of faith. It will be interesting to see how deep that faith runs.