Tesla Inc (NASDAQ:TSLA) is perhaps the most controversial stock on Wall Street. Let’s face it, both the bulls and bears have fairly passionate views. For example, Loop Ventures co-founder Gene Munster boasted that Tesla stock could be the next Amazon.com, Inc. (NASDAQ:AMZN).
Then there is Chamath Palihapitiya — a venture capitalist and former alum of Facebook Inc (NASDAQ:FB) alum — who believes that Tesla stock could be the next Apple Inc. (NASDAQ:AAPL).
Although, he is hedging a bit. Note that he has purchased convertible securities in Tesla stock!
Downside for Tesla Stock
On the bear side, there are also some standout investors like Jim Chanos of Kynikos Associates, who is a legendary short seller (for example, he has become a billionaire because of trades on companies like Enron and Worldcom). Consider that he thinks that Tesla stock is the “anti-Amazon!”
Actually, he thinks the company will continue to run low on capital, which will only accelerate with the recent acquisition of SolarCity. He even compared Tesla stock to Valeant Pharmaceuticals Intl Inc (NYSE:VRX), which Chanos scored a tidy profit.
But of course, so far Tesla’s Elon Musk has done a tremendous job in proving the bears wrong. For the year so far, the shares have logged an impressive gain of 68%.
Despite all this, I think the bears may have their day — and it could been soon. The reason: It’s the high stakes of the launch of the Model 3, which is expected to hit the markets later in the year.
For the most part, the nagging issue is the production capabilities of Tesla. Note that the company plans on delivering 500,000 vehicles next year. But to put this into perspective, the number for Q1 was only 25,000.
So the boost in production will put quite a bit of strain on Tesla’s infrastructure. It’s also important to keep in mind that the company has a history of recalls and delays.
In fact, Tesla will not even use initial prototypes for the production. While this will speed things up and lower the costs, there is also more potential for mishaps.
In the meantime, Tesla must deal with various other factors like the following:
- There will be a need to significantly increase the footprint of service centers and charging centers.
- Tesla will be under pressure with its massive Gigafactory, which produces batteries.
- The margins will be slim on the Model 3 since the list price is fairly low. So even minor cost overruns could have a big impact.
- The competitive environment is heating up, with offerings from automakers like General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), Honda Motor Co Ltd (ADR) (NYSE:HMC), AUDI AG NPV (OTCMKTS:AUDVF) and Mercedes.
- Politics is a wild card. President Donald Trump’s ditching of the Paris climate agreement should be a stark warning for those owning Tesla stock. For the most part, it seems like a good bet that the administration will be aggressive in rolling back subsidies and tax credits for electric vehicles, which could crimp demand for vehicle purchases.
- Oh, and Model 3 has a branding problem. According to Musk: “As Model 3 becomes available, one of our challenges will be to eliminate any misperception about the differences between Model S and Model 3. We have seen a belief among some that Model 3 is the newest and more advanced generation of Model S. This is not correct.” This actually helps to explain the recent fall off in customer deposits for the Model 3.
It’s all very daunting. And while Elon Musk is a tech visionary — with a history of pulling off the seemingly impossible — his abilities will certainly be tested. Big time.
But the problem is that Tesla stock is already reflecting much of the good news, leaving little margin for error. It’s a classic case of “pricing for perfection.” So in light of all the complexities, now may be the time to get very cautious.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
