Last year, TD Ameritrade named the most popular stocks among four different generations of investors. Millennials were the only generation to have Tesla Motors Inc (NASDAQ:TSLA) among their 10 most widely held stocks.
Regardless of how you feel about TSLA stock, here’s what many Millennials may be missing.
TSLA Stock Has a Steep Hill to Climb
Any time I write anything bearish about TSLA stock, the TSLA bulls love to talk about how electric, driverless cars are the future and Elon Musk is a great visionary.
I agree with both those points. I do. The problem is not Musk or the product. Tesla stock has three major hurdles to overcome in the next decade or so. First, TSLA has the task of disrupting a well-established auto industry that dwarfs it in size. TSLA sold about 50,000 vehicles last year. General Motors Company (NYSE:GM) sold 9.9 million.
And that brings us to the second problem, which is TSLA’s valuation.
Assuming the company can take a significant chunk of the global auto market, there doesn’t seem to be much upside for the stock. Tesla’s market cap is already roughly two-thirds that of GM. The stock is priced as if it has already succeeded when it has barely even begun.
Finally, the most troubling hurdle of all for TSLA is its aggressive spending and huge debt levels.
Back in 1968, NYU Stern Finance Professor Edward Altman developed a metric for determining the credit risk of public companies called the Altman Z-score. The formula for calculating the Altman Z-score takes into account working capital, total assets, retained earnings, EBIT, equity value, total liabilities and sales. Altman determined that a score below 1.8 meant a company had a high likelihood of bankruptcy.
The chart below shows the Altman Z-scores of a number of widely held stocks. The group includes blue chips like The Coca-Cola Co (NYSE:KO), growth stocks like Netflix, Inc. (NASDAQ:NFLX) and tech giants like Apple Inc. (NASDAQ:AAPL).
As you can see, TSLA stock has by far the lowest Altman Z-score of the companies included at 1.9.
But while Tesla currently remains above the 1.8 Altman bankruptcy threshold, it might not stay there for long. TSLA recently agreed to a buyout of SolarCity Corp (NASDAQ:SCTY). SCTY stock has more than $3.3 billion in debt and burned through $380 million in the most recent quarter. The company’s standalone Altman Z-score is a staggering -0.3.
Once the buyout deal is official, Tesla’s Altman Z-score will likely be dragged significantly lower than 1.9.
Speculation in Moderation
At the end of the day, TSLA stock is what traders often call a “story stock.” That means that if you believe in the Tesla story, you should buy the stock.
Personally, I don’t believe the story — at least not the version of the story that prices Tesla at two-thirds the value of GM.
Millennials who are investing for retirement and who believe that TSLA will become one of the dominant players in the auto industry should certainly consider owning at least some amount of its stock. However, the idea that Millennials have Tesla stock among their top 10 investments is a bit troubling.
TSLA stock is far from a sure thing. The stock’s sky-high valuation, aggressive cash burn and relatively tiny market share make the stock a very high risk/high reward speculative play at best. In the past year alone, Tesla is down more than 17%.
Speculative bets can certainly play a productive part in Millennials’ portfolios, especially while they are young. However, Millennials should know that TSLA is a majorly risky stock and should probably not hold too significant of a weighting in any long-term investment portfolio.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
