Morgan Stanley (MS) believes Tesla Motors (TSLA) is arguably the world’s most important car company. I couldn’t agree more. Certainly, its contribution to American manufacturing makes it an important component of the U.S. economy and a big part of a resurgent auto industry.
But that doesn’t necessarily mean you should own TSLA stock.
Like every other business, Tesla has its pros and cons. While Elon Musk and the rest of the Tesla team have done an exceptional job with the Model S, it is future projects like the Model X that will determine how high or low TSLA stock goes.
Tesla delivered 22,477 vehicles in 2013 generating over $2 billion in revenue. While that’s peanuts for any of the major car companies it’s a big accomplishment for a nascent business that didn’t exist until 2003.
So, should you buy TSLA stock? Well, let’s look at three pros and three cons to help decide.
TSLA Stock Pros
Margins: In January, Tesla granted stock options to certain employees to buy up to 782,500 shares of TSLA stock. The options were meant to help employees look beyond the Model S, and all vested based on four achievable milestones. One of those milestones was an annualized gross margin of 30% or more in any three-year period. In the trailing 12 months, Tesla’s gross margin was 24.9% — well below its stated goal, but much higher than a year earlier. Tesla expects that it can hit 28% by the end of this fiscal year. With the Chinese market on the radar, 30% doesn’t seem that far off. Any way you slice it, Tesla’s margins are the envy of the automobile industry.
China: Another milestone that needs to be achieved for the TSLA stock options to vest is annual aggregate vehicle production of 100,000. Tesla expects to deliver 35,000 Model S vehicles in 2014, leaving a 65,000-unit gap. Roughly 15,000 electric vehicles sold in China in 2013, yet the Chinese government hopes to have 5 million environmentally friendly vehicles on the road by 2019. Elon Musk estimates that TSLA will sell 5,000 vehicles in China in 2014 — a very conservative number given the thirst for American luxury in China. With the addition of the Model X in 2015, it’s possible Tesla could get to the 100,000 mark by 2017.
Gigafactory: Working in conjunction with its battery supplier, Panasonic (PCRFY) of Japan, Tesla will spend $5 billion to develop a state-of-the art factory that will turn out enough lithium batteries to power 500,000 vehicles. More importantly, Tesla figures the factory will reduce its battery cost by 30%, putting the cost per kilowatt hour below $200. According to Sanford C. Bernstein, this would make the Model S cost-competitive (not including subsidies) with combustion engines. If so, you can bet TSLA stock will head much higher as a result.
TSLA Stock Cons
Stock Price: Even the best companies get overbought. TSLA stock gained 10% this past week, the best performance in the Nasdaq-100. It’s also up 53% year-to-date and up 128% over the past 52 weeks, and is trading within 10% of its all-time high of $265. Its market cap per car sold in 2013 is $1.3 million, compared to $18,540 for Toyota (TM). That’s a sizable difference, and Elon Musk acknowledged as much in a CNBC interview from earlier in June in which he openly admitted that the company would have to execute well during the next few years to justify its stock price. While he didn’t come right out and state it was overpriced he did imply that a lot would have to go right for TSLA stock to continue its high-flying ways.
Dealer Network: There are those that believe Tesla needs a traditional dealer network to sell a lot of cars. I don’t agree. However, I so believe states like New Jersey are taking up way too much of the company’s time. Lobbyists across the country are doing what they can to keep Tesla’s business model from taking hold because they know how much more profitable it is. The more time Tesla spends in courtrooms, the less time it spends focusing on building cars. It’s a big distraction that eventually could do harm to TSLA stock.
Competition: Several car companies are competing with Tesla in the electric vehicle marketplace. All of them have substantially greater resources to keep up the fight indefinitely. Fortunately for Tesla, its Model S is unrivaled when it comes to luxury electric vehicles … but that could change if BMW’s i8 and i3 truly deliver the goods. Barclay’s analyst Kristina Church is quoted in Barron’s as saying, “We think BMW have positioned themselves as tech leaders to out-rival premium peers such as Tesla.” Things look rosy for Tesla now, but any success by BMW and others will seriously slow TSLA stock momentum.
While TSLA stock is priced for perfection, I don’t think anyone can deny Elon Musk’s latest move — opening up the vault of Tesla patents in a not-so-altruistic move to expand the electric vehicle market — is a brilliant one.
True innovation requires openness.
TSLA stock might be expensive today, but should it get the Model X into production as well as a cheaper, third-generation vehicle, its $29 billion market cap will seem utterly tiny.
Execution is the difference between winning and losing. Elon Musk has never been one to not follow through.
Yes, you should buy TSLA stock. Just don’t expect another double over the next 52 weeks.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.