Even beloved stocks like Tesla Motors Inc (NASDAQ:TSLA) aren’t infallible. Call me a glutton, but I like reminding investors of that. Doing so invariably stirs up some outrage, but if it gets people to think about the risks, so be it. And Tesla stock is anything but a sure thing.
Before your collective vitriol bubbles over and scorches the earth, I like Tesla Motors as a business. While Elon Musk didn’t invent the electric vehicle, he definitely popularized what many would’ve called a moonshot a few years back. It’s no wonder Tesla stock is up 550% since the end of 2012.
TSLA shares, however, are currently priced right where they were in the early part of 2014, as the reality of the expense of being a pioneer is becoming painfully clear to the market.
Just to prevent people from showing up at my doorstep with pitchforks, tar and feathers in hand, let me reiterate that this isn’t necessarily a prediction of an implosion. This is an exercise to get everyone thinking about the factors that could work against the value of TSLA stock.
Then again, these are the issues most likely to create big trouble for Tesla Motors and TSLA stock. It could be considered the ultimate bear case for the maker of uber-cool electric vehicles.
In no certain order, here are three things that could go wrong for Tesla.
Not Enough Affordable Lithium
Lithium, the key component found in battery packs, is necessary to propel an electric vehicle. It’s the lifeblood of the vehicle, so to speak. The problem, however, is that lithium miners are having a hard time meeting the demand. And what is available is becoming stunning expensive.
Since the middle of 2015, lithium prices have jumped about 200%, reaching $20,000 per metric ton. And as lucrative as it’s become (and it will likely remain at those prices), it’s not as if the industry can easily ramp up output. Indeed, CEO Elon Musk has already commented “we would basically need to absorb the entire world’s lithium-ion production.”
More sources are being found and developed, but the math of the supply/demand dynamic is concerning. Battery prices could soar. Granted, they’ll soar for all EV companies, but Tesla Motors is the most vulnerable.
More Competition on the Horizon
Diehard TSLA fans laugh at the premise of Tesla having any real competitors. After all, Tesla Motors is on this electric road sans peers, right?
Actually, wrong.
While it is true that the Model S remains the world’s best-selling EV, it’s not as if other manufacturers aren’t doing well. You just don’t hear about them because those companies don’t have a high-profile guy like Musk tweeting out headlines.
While 15,000 Model S’s have been sold so far this year in the United States, Chevrolet has sold 14,295 of its electrified Volt. BMW (OTCMKTS:BMWYY) has sold nearly 11,000 electric vehicles in the U.S. this year so far, and frankly, isn’t even trying that hard.
And just this week, General Motors Company (NYSE:GM) brand Chevy announced the Bolt would be capable of a 238 mile round trip without a recharge, which is right in line with Tesla’s top range.
Also this week, Volkswagen AG (ADR) (OTCMKTS:VLKAY) and BMW announced they would jointly install a network of fast-charging stations all along the east and west coasts, following the lead of Tesla and its charging network.
See that on the horizon? That’s competition.
Tapping the Financial Well Dry
Tesla Motors hasn’t had a problem raising capital in the distant past, but investors have since grown weary of the constant (and seemingly more frequent) secondary offerings that not only create dilution, but aren’t clearly being deployed effectively.
For perspective, since the end of 2012, TSLA has raised nearly $7 billion through the sale of Tesla stock or loans. Musk has already made it clear he’ll need a lot more capital in the near future if it’s going to reach a production pace of 500,000 automobiles per year. Some think that number could be as much as $9 billion within the next two years.
Problem is, weary funders may not be willing to fork it over … at least not on terms compelling to Musk and existing TSLA shareholders. The cost of capital is going up, and that’s assuming they’ll offer more capital at all now that viable competition could eat into Tesla’s market share.
Bottom Line for Tesla Stock
I can’t stress enough this isn’t a call for the end of Tesla — I truly believe there will always be a Tesla Motors from here on out.
It is a warning, however, to owners of Tesla stock who have drunk the proverbial Kool-Aid and bought into the premise that the company is a guaranteed winner. No company is a guaranteed winner.
In fact, if anything, Tesla Motors is on the defensive — a position Musk isn’t used to being in.
Hopefully the truth doesn’t hurt too much.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
