Editor’s note: This column is the latest update in our 10 Best Stocks for 2014 contest. Kyle Woodley’s pick for the contest is Tesla Motors (TSLA).
Question: When are 60% returns in six months disappointing?
Answer: When the other guy is running off 140% returns.
I jest, I jest. There’s nothing disappointing about the gains enjoyed by my 10 Best Stocks for 2014pick, Tesla Motors (TSLA). Sure, I’d love to be leading the pack like Jon Markman, whose Emerge Energy Services LP (EMES) pick has stormed forward some 140% this year, but … well, a silver medal at the midway point ain’t too shabby.
I am, however, a bit less sanguine about where TSLA stock sits heading into the second half of the year.
Because whereas the outlook at Jan. 1 looked like a simple run to exponential growth, in the past six months … things got weird, in a couple of ways.
The Tesla Gigafactory
Earlier this year, TSLA announced plans to build a so-called Gigafactory, an ambitious $5 billion project that’s expected to start producing lithium-ion batteries in 2017, and by 2020 produce more batteries for EVs than the world’s total global production as of last year. In the process, Tesla estimates that the Gigafactory would reduce the per-kWh cost of battery packs by roughly 30%.
The big concern here, of course, is the sheer size and scale of the project.
For one, at $5 billion, the Gigafactory’s cost represents a sixth of Tesla’s overall market capitalization and roughly double TSLA’s cash and short-term investments.
Plus, Tesla says the Gigafactory would produce enough battery packs annually to power about 500,000 vehicles (in addition to any other batteries the factory might produce for other purposes). To put that in perspective, Tesla Motors’ goal for Model S deliveries this year is 35,000 cars.
Hopes of breakneck growth are a big part of why I picked Tesla to begin with, but now TSLA really needs that sales expansion to become reality if the company has any hope of keeping investors pleased.
Elon Musk Getting Charitable?
There are no hard numbers to tack onto this worry — merely conjecture about things we don’t know, and a mind that no one can read.
In mid-June, Elon Musk announced that he was opening up all of Tesla Motors’ patents for, more or less, the benefit of mankind. Musk’s hope is that by making available some of the blueprints to his EV technology, the rest of the automotive world will catch up faster.
Shortly after that, we got reports that Tesla was talking to BMW (BAMXY) and Nissan (NSANY) about how to work together in expanding EV-charging networks — almost certainly Tesla’s current Supercharger system.
The big worry, of course, is that Elon Musk really does care about the future of electric vehicles and a greener earth that he’s willing to sacrifice corporate profits to get there. You wouldn’t be blamed for thinking that — Musk has rankled shareholders before with brutally honest, investors-second comments, and he specifically pointed out in his blog post that the patents were made available “for the advancement of electric vehicle technology.”
But a couple things put my mind to ease here.
Open-source technology does not a business topple. Just ask Google (GOOG) how Android is faring. No one’s exactly shaking over at Red Hat (RHT), either.
Also, Musk is smart enough to know it’s hard to effect big change without big money. Musk is worth some $12 billion, but his Tesla stock holdings represent nearly half of that. Letting TSLA burn to the ground wouldn’t further any of his goals, so he certainly wouldn’t be the one striking the match. Thus, it’s easy to believe Musk’s insistence that “We believe that applying the open source philosophy to our patents will strengthen rather than diminish Tesla’s position in this regard.”
So, What Does This Mean for Tesla Stock?
Tesla has other concerns on the forefront — for instance, I’m not exactly thrilled that established, quality-producing BMW is getting generally favorable reviews for its electric i3. It’s one thing to laugh when comparing the Model S with a Nissan Leaf or a Chevrolet Volt … but it’s another when a German luxury powerhouse comes knocking on your door.
I’d say the Gigafactory gives me the most pause, however, and that’s because (as I’ve mentioned before) I’m typically pretty risk-averse and hate dealing with the fun unknowns of innovative, untested, multiyear, multibillion-dollar projects.
Still — and maybe this is the worst reason to invest in (or keep holding) a particular stock — I remain bullish on Tesla if only because it hasn’t let me down yet, and Elon Musk & Co. haven’t really given me a reason to think it will anytime soon.
Besides, international expansion continues to go swimmingly, the Model X is now lined up to come out in early 2015, and the Model E is expected to be competitively priced against the Audi A4 and BMW 3-series.
As we hit the halfway point of this contest, I increasingly think of this Tesla pick like I do relationships. After 60% gains and a little turbulence along the way, we’ve officially passed the wild, irresponsible puppy-love phase. Now, the conversations have turned a little more serious as we start to think about the uncertain future.
That doesn’t mean that Tesla’s bad. Far from it. TSLA has oodles of potential left.
You just have to be realistic about the potential implosions, and be mentally prepared to cut bait if things go south.
Practically, that means setting stop-losses to protect your gains … though I wouldn’t suggest using that terminology in your next serious convo with your sweetheart.
Kyle Woodley is the Deputy Managing Editor of InvestorPlace.com. As of this writing, he was long TSLA. Follow him on Twitter at @KyleWoodley.