Shares of Tesla Motors (TSLA), which have skyrocketed more than 300% this year, have plummeted in recent days as investors worried about the reports of a third vehicle fire, which is being investigated by the National Highway Transportation Safety Administration.
Investors who are eager to get a piece of Elon Musk’s high-flying company might want to hit the brakes as well.
“There are fires every day with gasoline cars and no one thinks twice about it,” says Larry Dominique, the president of market research firm ALG, in an interview, adding about the fires: “Certainly it adds to some headwinds for Tesla. That’s unfortunate, but it’s a reality.”
Although Tesla stock has slumped more than 20% during the past month, only investors with an extremely high tolerance should consider buying TSLA at this point.
TSLA bulls are assuming the latest fire isn’t the result of a mechanical defect and that demand for Tesla vehicles will continue to soar. That view is unrealistic for several reasons — even if the fire, like the others, isn’t found to be the automaker’s fault.
For now, the Model S, which received Consumer Reports’ highest-ever rating, is mostly a second or third car for wealthy consumers; very few people use it for their sole means of transportation. Also, luxury car-buyers are more likely to lease for shorter time periods rather than purchase their cars outright. By the time their leases for their Teslas expire in a few years, a plethora of new upscale electric vehicles from everyone from General Motors’ (GM) Cadillac to Mercedes-Benz will be competing for their attention.
“They really haven’t had competition,” says John Gartner, transportation director at Navigant Research.
TSLA is expected to produce 20,000 vehicles next year and 40,000 in 2015, so it doesn’t pose an immediate threat to luxury car brands either. U.S. sales would need to more than triple from 2014’s numbers to catch Volvo, which as of 2012 was the ninth-best-selling brand at nearly 62,000 units. No. 1 Mercedes sold 245,926.
“You can sell a couple of thousand of anything,” says Karl Brauer, a senior analyst at Kelley Blue Book.
Several things need to happen for TSLA to reach the heights of those mainstream brands. Although Tesla deserves credit for creating a battery that runs 200 miles on a single charge — which experts say is the minimum needed for a commercial electric vehicle — producing these batteries in bulk has proved to be a challenge. As Brauer notes, batteries require lots of different compounds and chemicals, and thus “You can’t just decide that we are going to make more batteries.”
Already, Wall Street is fretting about Tesla’s production. TSLA said it delivered 5,500 vehicles in the quarter ended Sept. 30. While that was more than the 5,000 that Tesla had forecast, it was less than the “whisper number” of 7,500 and led to a slump in Tesla stock.
As Tesla broadens its product line next year with the Model X crossover, it will face even more challenges.
Pricing will be key. Tesla’s Model X reportedly will sell between $40,000 and $50,000, which will appeal to more consumers.
“To date, that will be their first attempt to hit the middle ground,” Gartner said.
While Tesla certainly is innovative and its CEO, Elon Musk, is among the most colorful, many people seem to forget that TSLA hasn’t yet made money on an unadjusted basis and might not for some time. Tesla’s costs will skyrocket in the coming years as it faces increased competition from the mainstream auto industry.
Tesla stock might just come out on top. Or it might get crushed. Right now, it’s too soon to tell.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him at Berr’s World.