The parallels between Tesla Inc (NASDAQ:TSLA) and Amazon.com, Inc. (NASDAQ:AMZN) are uncanny. Both boast iconic CEOs who are willing to take bold risks and push the boundaries of innovation, both are high-growth tech stories … heck, both companies each have heavy capital costs and low margins. But there are a few big differences between TSLA stock and AMZN stock, and the don’t favor Tesla bulls.
While Tesla has made massive gains to jump the $50 billion market capitalization mark, overcoming Ford Motor Company (NYSE:F) and (more briefly) General Motors Company (NYSE:GM), it’s dwarfed by Amazon and its $445 billion market cap. The companies are simply in different universes right now.
Could that change? Maybe … to an extent. Lavish returns seem likely, but to truly be on the same scale as Amazon, we’re talking about 900% returns in TSLA stock from here.
And there are several differences between the two companies that make that kind of performance unlikely. Today, we’ll look at three:
#1: Product Concentration
Amazon and its $136 billion in annual revenues have been built on its massive e-commerce business, but it has expanded to include other streams of income, including Amazon Web Services (AWS), Amazon Prime, the Kindle, Amazon Echo, Fire TV, Amazon Prime, the Dash Button and more.
While e-commerce is still the lion’s share of the top line, these other services are helping boost the bottom line.
By comparison, TSLA relies on a mere handful of high-priced products that require advanced manufacturing. That’s magnified by the company’s history of missteps and delays, and could be increasingly problematic as Tesla embarks on its mass-market project, the Model 3. This will require ramping vehicle production from 1,088 per week to roughly 10,000 per week during the next couple years.
As InvestorPlace.com’s Will Ashworth recently remarked: “If the Model 3 doesn’t get the same kind of reviews from consumer product testing groups as the Model S gets, Tesla shareholders will look back on $300 as the price at which they should have sold.”
You could argue that the fold-in of SolarCity adds diversity to Tesla’s product line, but considering how unprofitable SolarCity was … it’s hard to factor that in as a positive yet.
#2: Competitive Advantages
Amazon.com represents a classic case of technology disruption. Traditional brick-and-mortar operators have had to spend large sums to build their e-commerce platforms while also maintaining the existing retail footprint. But these companies don’t have the wide array of offerings that Amazon does, nor the ability to offer services at scale, such as Prime and its low-cost delivery.
Moreover, Amazon turned itself into a top-of-mind brand, a la Alphabet Inc’s (NASDAQ:GOOGL) Google. That’s more important than most investors realize.
Amazon’s heft has been enough to damage Macy’s Inc (NYSE:M), J C Penney Company Inc (NYSE:JCP) and Sears Holdings Corp (NASDAQ:SHLD). Even Wal-Mart Stores Inc (NYSE:WMT) has not been immune to the challenges. And that’s not to mention the brick-and-mortar retailers that have already disappeared or are in the midst of bankruptcy reorganization.
Tesla is a disruptive force, but it doesn’t have quite the same advantages of Amazon.
Ford and GM, as well as the rest of the automotive world, is spending big on their own innovation efforts, which while slower still were in gear while Tesla was making its name. Some of these operators might even gain access to tech from firms such as Alphabet, Apple Inc. (NASDAQ:AAPL) and Intel Corporation (NASDAQ:INTC), which should help them catch up even faster.
A study from Navigant Research concludes that TSLA is actually ranked 12 out of 18 in the self-driving industry. A key reason for this is that the company’s manufacturing operations have yet to be tested at scale. So while Tesla might be the first name in electric vehicles, it’s not the leader in the clubhouse for another game-changing driving trend.
#3: Margins
One of the most important parts of the AMZN story right now is Amazon Web Services, which is really helping out Amazon’s capital situation. Note that last year, AWS posted operating income of $3.1 billion, offering wide margins against Amazon’s extremely thin-margined e-commerce operations.
These kinds of profits will allow Amazon to invest in far-flung efforts that could spawn new growth opportunities.
Tesla doesn’t have this luxury. The company has consistently churned out negative free cash flow, including a bleed of $1.6 billion last year. To keep operations going, TSLA has had to frequently issue new equity and borrow funds.
The aforementioned acquisition of SolarCity will likely only make things worse.
It’s also far from clear what level of production Tesla needs to hit to achieve sustainable cash flows. Fiat Chrysler Automobiles NV (NYSE:FCAU) CEO Sergio Marchionne estimates that it might be an astounding 15 million vehicles per year.
Bottom Line on TSLA Stock
None of this should rain on the idea that Tesla can still continue to offer rip-roaring gains in the future. But when thinking about the long-term — as in, decades down the road long-term — it’s important to consider the true potential scale of a company.
Amazon right now boasts the perfect tool set, with an indomitable base business, a growing high-margin arm and a CEO who’s willing to test just about anything. Tesla has a lot of positives, but it’s still limited in its resources.
Thus, TSLA stock might be a buy … but keep your expectations realistic.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
