One of my favorite topics in the stock market these days is Tesla Motors Inc (NASDAQ:TSLA). For anyone who likes an underdog story filled with drama and suspense, TSLA stock is as good as it gets.
Tesla — the company — has been an incredible success up to this point. TSLA stock has also been one of the best stocks in the market in the past five years. Unfortunately, the company now has extremely high expectations, and Tesla stock has an even higher valuation. I’ve been very critical of the bull case for TSLA. I wholeheartedly believe it’s one of the most dangerous popular stocks in the market today.
Yet I am the first to admit that if the Tesla story has a happy ending, it could easily double within the next couple of years. If not, I believe the bottom will fall out of the stock and the company may end up dead in the water.
The TSLA Stock Bear Case
In the past four quarters, Tesla shipped 76,000 automobiles, generated over $6 billion in revenue and registered $874 million in net income losses. Last year, General Motors Company (NYSE:GM) shipped 9.8 million automobiles globally.
In the past four quarters, GM generated $162.1 billion in revenue and reported net profits of $14 billion. Yet somehow, TSLA stock is valued at a market cap of $39.2 billion compared to GM’s valuation of $56.9 billion.
Why? The Tesla bull case involves the Model 3 and subsequent affordable Tesla models taking over the global mass auto market. If that’s the case, TSLA stock will eventually justify its absurd valuation.
I’m skeptical. Elon Musk has made too many promises that will require perfect execution to keep. Anyone who has operated in the business world knows things rarely go exactly according to plan. Tesla plans to ramp production from 50,000 in 2015 to 76,000 in 2016 to 500,000 in 2018. Musk also promises that Model 3s will begin shipping by the end of 2017 and will start at $35,000.
Just ask any TSLA stock bull, and those are the reasons they like the stock. To me, that means that at the bare minimum, all of those assumptions need to actually happen to justify Tesla’s current valuation.