Since 2012, automotive-industry disrupter Tesla Motors Inc (NASDAQ:TSLA) has raised roughly $6.5 billion from investors to support its audacious ambitions.
So far, Tesla stock has accumulated losses in the billions from the capital it’s raised. But as you may well know, past performance has little to do with what might happen in the future.
Also, in its current full year (2015 to 2016 results have yet to be finalized) of operations, Tesla reported a loss of $888 million and spent $1.6 billion to develop new factories and manufacturing capabilities, including a pioneering “gigafactory” to churn out scores of lithium batteries for its automobiles and burgeoning solar operations.
Tesla also issued more than $300 million in debt and sold another $730 million in stock. Revolutionizing industries is not a cheap undertaking.
Things got more interesting in July when Tesla announced it would purchase SolarCity. Investors approved the deal and SolarCity was folded into the corporate fold. The term “clean energy empire” has been mentioned, with potential synergies of using Tesla’s batteries to store energy produced from solar panels on the top of consumer roofs. Clean energy is the all-around goal.
Tesla’s Auto Ambitions
Of course, Tesla has huge plans and first intends to revolutionize the automotive industry. In many respects, it is just getting warmed up as a company. Its fourth-quarter net orders for new cars (its Model S and Model X) jumped 52%. Vehicle production increased an impressive 64% to nearly 84,000 vehicles for all of 2016.
Scale is key for Tesla’s vehicle operations. It will improve car reliability and lower warranty costs because of manufacturing efficiencies. Growth also provides operating leverage. More sales help offset fixed costs in factories, showrooms and everything that goes with building a car company from the ground up. Management likes to highlight a steady improvement in gross margins to illustrate the benefits of its growing scale.
The Solar and Autonomous Auto Wildcards
The same goes for SolarCity. Elon Musk, who effectively controlled both Tesla and SolarCity before they merged, spoke to creating a solar roof product for homes. Manufacturing scale also benefits the production of solar panels and distributing throughout the country. High-efficiency cells at a low cost is the goal in this part of the business.
Tesla also has big plans for self-driving cars. Other players in the space include the venture capital unit of Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL), and Nvidia Corporation (NASDAQ:NVDA), who builds chips to support autonomous vehicle capabilities.
Is Tesla Too Ambitious?
There is certainly an argument to be made that Tesla is too ambitious. Musk has spoken about producing a million cars by 2020, and its gigafactory is said to cost as much as $5 billion, though other partners and suppliers will share in the expense.
SolarCity is thought to be cash flow neutral when it is officially folded in during the last quarter of 2016. However, it did add more debt to the capital structure.
Analysts are projecting earnings losses for 2016 and 2017. This year, they estimate a loss of $2.15, but a significant improvement to a loss of only 73 cents for all of 2017.
Those that are offering an investment opinion overwhelmingly believe the stock is a “hold” (versus a sell or buy) right now.
There is little denying the investment uncertainty is high for Tesla stock. There are many moving parts, and there isn’t much current visibility on positive profit or cash flow production. In fact, there are likely to be many more years of aggressive spending and investment to scale the car and solar operations.
The Bottom Line on Tesla Stock
The market capitalization for Tesla stock currently sits around $37 billion. That seems a rather high number for a company generating only about $6 billion in annual sales and nothing to speak of in terms of profits.
An investment in Tesla stock is really a call on Elon Musk’s ambitions and his vision of creating a truly revolutionary automotive and energy firm. Certainly, energy stored via batteries has many benefits over current technologies supported by gas and other fossil fuels to create energy.
Storing energy through batteries has huge potential ramifications for the global energy sector, and helping scale that development via a giant gigafactory in the Nevada desert could turn out truly revolutionary.
But investing in the potential is another story.
To me, it seems too risky to hope that sales and profits come flowing in within a decade. There will likely be many ups and downs, with many chances for investors to buy in with more certainty down the road.
Until then, they might want to consider stodgy General Motors Company (NYSE:GM), which has a reasonable valuation and high dividend yield. It won’t benefit from the growth in consumer solar panels, but stands a good chance at participating in the electric and autonomous automobile markets that Tesla is paving a new path in.
As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.
