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Tesla’s No Flash in the Pan

Electric-car manufacturer Tesla (TSLA) announced last night it is the first U.S. automaker that has fully paid back Uncle Sam’s low-interest loans meant to encourage alternative fuel technology.

That’s no small feat, considering these Department of Energy loans have been extended to such controversial entities as now-defunct Solyndra — and considering Tesla racked up $465 million plus interest. This was not just chicken feed.

Oh yeah, and the original maturity date of the loan was 2022 … nine years from now.

It’s the latest sign that Tesla is on track to becoming the automaker of the future. The company reported its first-ever quarterly profit not long ago, scared out the short-sellers and went parabolic. The stock is now up 150% year-to-date in 2013, and up sixfold since its IPO price of $17 a share.

So will Tesla last?

I think so. The cars from Tesla clearly have sex appeal and are getting rave reviews — including the highest-ever rating for an automobile by Consumer Reports. Reservations have been red-hot, and the company is issuing more stock to raise capital to boost production capacity so supply can keep up with demand.

And a recent Bloomberg article quoted Tesla CEO Elon Musk as saying the offer price will be increased 30% over previous levels thanks to the soaring share price and strong investor interest.

Furthermore, broadly speaking now is a good time to be a U.S. automaker after a lot of heartache in the last few years. A recent report indicates that General Motors (GM), Ford (F) and Chrysler are all canceling their typical summer idling at American factories thanks to strong buyer demand and a need to keep the lines running.

If you think Tesla is just a flash-in-the-pan fad, think again.

Because even if these headlines aren’t enough, the bloodbath for the short-sellers should be enough to give any investor pause before betting against TSLA and Elon Musk.

Of course, Tesla has risks that investors have to know about — not the least of which involves buying a top after the massive momentum of late. Short interest was almost 45% of available TSLA stock as of the end of April, and clearly some of the “buying” momentum has actually been short-sellers covering their trades. You have to wonder how high Tesla will go before investors start selling to take profits and the buyers lose interest.

And beyond the froth in shares after this run, there are questions about Tesla’s long-term profitability. The company itself admitted that a decent portion of its Q1 revenue — about 12% — was thanks to selling its zero-emission credits to other automakers. In other words, automakers that need to meet an electric vehicle quota with governments like the State of California can simply pay Tesla a fee and claim some of its output as their own. It’s a shell game, but it’s completely legal — and lucrative for TSLA.

This is clearly not organic growth, and many decry the practice as government pork. But money is money — and even beyond these credits, the fact remains that Tesla is selling vehicles to consumers at a good clip regardless of who gets the zero-emission credit in the eyes of California.

Furthermore, when Tesla reported its profit it was sitting on a backlog of 15,000 orders … and the company does not book actual revenue until the vehicles are shipped. That means the sales will keep rolling for some time based on existing consumer interest.

In short, while valuation and sentiment could be a bit tenuous, the viability of Tesla is not up for debate. This company is here to stay.

The jury is still out for those other companies with Department of Energy loans, however. There are 32 other projects outstanding, including Fisker Automotive, which is struggling with bankruptcy fears and a potential Chinese buyout to keep it alive.

So for the time being, in the absence of competition from other EV makers, the only thing Tesla has to worry about is sentiment … and whether investors are willing to bid it higher now or later.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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