Until late last year, the stock of Tesla Motors (TSLA) seemed to only know one direction: Up. But after two corrections — one late last year, and the current funk in Tesla stock dating back to early March — the momentum has greatly shifted to the downside.
Tesla’s first-quarter earnings are a big driver of the decline. While it was solid, it wasn’t a blow-out — and when you’re a big, growthy momentum company, that’s what your shareholders crave.
Tepid guidance for vehicle deliveries weighed on Tesla stock as well. For Q2, the company put out a forecast of 7,500 units, which was below the analysts’ estimate of 7,827 units.
But if you’re looking to buy a dip, this certainly is a dip. So, should investors looking at the long term consider the recent selloff a nice opportunity to pick up Tesla stock?
To see, we look at the pros and cons:
Pros on Tesla Stock
Unique Business Model: Until Tesla Motors came around, the auto industry saw mostly incremental innovation. But the company’s visionary co-founder and CEO, Elon Musk, changed that, focusing specifically on electric vehicles. He created a game-changing company — Tesla’s cutting-edge software and hardware makes the company feel more like a tech stock than an auto firm, and Tesla has even garnered top Motor Trend awards — and the result has been massive gains in TSLA. All of this has been driven by its direct sales model, bucking the traditional dealer model and giving Tesla better control over inventory … though not without some fuss. TSLA also has been developing an innovative ecosystem, rolling out “Supercharger” charging stations across the U.S. and Europe that harness solar power to allow for long-distance driving.
Battery Advantage: TSLA has gained cost efficiencies and improved performance by having control over the powertrain and battery pack systems. And TSLA is doubling down on the battery side by breaking ground on an ambitious $5 billion program to build a huge battery factory called the “Gigafactory.” Musk believes the Gigafactory will result in reducing battery costs by 30% per kilowatt hour, which would give TSLA a major competitive advantage.
China: The market could provide a nice boost for Tesla stock. The rise of affluence in the Chinese economy is pushing strong demand for cars, especially on the luxury end. Meanwhile, the government is pushing to increase the number of EVs to battle rampant pollution in its major cities. Tesla is expanding aggressively in China, expecting to open locations in 12 cities. Musk says China will be a key for the expected 56% spike in sales for 2014.
Cons of Tesla Stock
Backlash: As mentioned before, traditional automakers are fighting back against Tesla on its sales approach, which they say threatens their current dealer models, and they’re even attacking it on a legal front. These efforts have seen more success than not in Missouri, Texas, New Jersey and Arizona, and while Tesla still is allowed to sell cars in those states, it does put a wrench in how Tesla does business.
Competition: Again, TSLA has some key advantages in terms of technology and manufacturing. But the rising competition could still be a problem. Keep in mind that BMW has been making strong progress in the EV market. Its new vehicles, which include the i8 and the smaller i3, hit both the higher-end sports and more affordable audiences, and have the benefit of an established luxury brand. But other companies could also pose threats, such as Ford (F), General Motors (GM) and Nissan (NSANY).
Valuation: Shares’ 25% drop since March has made Tesla stock cheaper on a nominal basis, sure, but it’s far from cheap on a valuation basis. TSLA stock currently trades at 59 times next year’s earnings, vs. just 7 for GM and 8 for Ford. Heck, even compared to dot-coms like Google (GOOG), with its 27 forward P/E, Tesla stock is steep.
Tesla has pulled off the seemingly impossible — building a viable electric car company from scratch against the big powers of Detroit, Japan, South Korea and Europe.
But Wall Street has already factored in much of the good news in TSLA stock, meaning Tesla still is vulnerable to any further missteps.
And there are plenty of potential traps on the horizon. Snags and delays in the Gigafactory. Success in BMW’s i-Series. Hassles in China, which is notorious for its governmental red tape. Not to mention already existing problems like the continued push back of its Model X release date.
So should you buy Tesla stock? No — while Tesla Motors is a great company, TSLA as a stock has too many risks for the price.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.