Tesla Inc (NASDAQ:TSLA) investors have had cause for celebration lately. Tesla stock has soared above $300/share, earning profits and putting the skeptics in their place. A huge new price target out last week is just the latest cause for excitement.
Behind the optimism, however, dark clouds remain. Waymo is shaping up to be a serious threat. It could end up being a game changer for Tesla stock, in fact. And the company’s well-known cash burn problems haven’t let up either.
That said, Tesla is a well-known short, and it may not be a good one for several reasons. Let’s look at the various pros and cons for Tesla stock as it nears new all-time highs.
Tesla Stock Cons
Waymo Threat: Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has a serious competitor to Tesla. A recent note from Morgan Stanley suggests that Waymo has a standalone value of $70 billion. Tesla, it’s worth remembering, currently has a market cap of just $50 billion.
What explains the superior valuation? Morgan Stanley assumes that Waymo will take 1% of total global miles driven by 2030, and earn $1.25 per mile in revenues. That revenue rate seems quite high, unless a nasty bout of inflation comes along between now and then. Getting 1% of the market would be achievable, though. In fact, they could potentially get more. And if Waymo partners with Lyft, it could really become a strong competitor. A standalone Waymo could really ding Tesla’s perceived competitive advantage.
Self-Driving Technology Deficit: For all the excitement Tesla’s self-driving system has generated, it badly lags several competitors in ability. CNBC published an article recently describing how Ford Motor Company (NYSE:F) is “panicking” because it is so far behind Waymo in tech.
CNBC cited data showing that Waymo-powered vehicles make it more than 5,000 miles autonomously per time that the software has to disengage from piloting the vehicle. Ford came in third, at 196 miles per disengagement. BMW (OTCMKTS:BMWYY) came in second, with a respectable 638. However, all seriously trail Waymo. Tesla, rather lamentably, scored just 3 miles per disengagement. This data does come from a small sample size, and surely Tesla will fare better in the future. Still, it’s an ominous piece of data, particularly given the potential valuation Waymo could score as a standalone company.
Working Conditions: Tesla got hit with some nasty publicity last week. The worker’s rights group Worksafe published a report suggesting that in 2015, workers suffered injuries more frequently at Tesla’s Fremont factory significantly more often than the accident rate for the industry as a whole. Tesla responded, saying that it previously had workplace safety issues as it was ramping up production, but that these have now been resolved. Regardless, it came as an added blow.
The Guardian recently reported on safety conditions at the same factory, suggesting that numerous workers have been passing out or having seizures there. For a normal company, this sort of story probably wouldn’t get much traction. But Tesla has an image to maintain with the sorts of consumers who would find working conditions to be important.
Tesla Stock Pros
Big New Price Target: Ben Kallo, from Baird, continues to love Tesla stock here. His most recent report suggests that we’ll being seeing a $566 Tesla stock price in the future. That’s 80% up from today’s price. That’d be a pretty amazing gain.
Why is Kallo so bullish on Tesla stock? He wrote that: “While tech companies focus on developing autonomous driving or battery technology, and traditional automobile companies are beginning to invest in electrification, we think Tesla stock has a unique expertise across all of three of these businesses.” Specifically, he sees Tesla selling one million vehicles a year by 2020, at an average selling price of $52,000/vehicle. If Tesla can pull that off, Kallo could well be right about TSLA stock.
Bears Wrong in the Short Term: Vince Martin lays this one out well. As he explains, there simply isn’t a catalyst for the stock dropping soon. Martin writes:
“But, even if the bulls are wrong, they won’t know that for years. That does little for a Tesla short in 2017. As long as the narrative of Tesla’s out-year profit potential exists, it’s going to be difficult for TSLA stock to come crashing back to Earth.”
Tesla is a long-term story. Bears keep arguing that Tesla is overvalued, and they have a good argument. But without anything tangible right now to latch on to, there’s no need for Tesla to decline in the near-term.
Solar Roof’s Hot Start: RBC Capital met with Tesla’s CFO recently. After that meeting, RBC reported that Tesla’s solar roof is sold out well into 2018. Apparently, the roofs are selling well ahead of Tesla’s expectations for the product. The company is hiring folks at its factory in Buffalo, New York to ramp up production. While it’s hard to tell how demand will settle out once the product isn’t a novelty anymore, it could turn into quite a big business for Tesla. Even 20,000 roofs a year at $50,000 average selling price would be a billion dollar-a-year business. We don’t yet know what sort of profit margins this business would deliver either, but at this point in Tesla’s story, top-line growth is enough to power the stock.
Verdict on Tesla Stock
Tesla stock remains one of the most exciting stories of our time. Its proponents view Elon Musk as one of the generation’s greatest visionaries, and think his ventures are headed for world-changing levels of success. The bears, on the other hand, keep pointing out the flaws.
So far, optimism has prevailed. But the bears do have some good points, even if they’ve been dead wrong about TSLA so far. With Tesla stock near new all-time highs here, this isn’t a bad time to consider locking-in some profits if you’re long.
At the time of this writing, Ian Bezek had no positions in any of the aforementioned stocks. You can reach him on Twitter @irbezek.
