Tesla Motors (TSLA) stock is down more than 25% from its highs earlier this year as the momentum stock has run out of gas.
Some say Tesla stock is now a bargain after the selloff, between its dominant Tesla Model S sedan and big plans to expand; not only is Tesla pushing into Europe and Asia, but TSLA is planning to launch a Model X electric SUV within the next year to complement its popular four-door EV.
But investors who are banking on Tesla returning to its recent highs might be a bit unrealistic. TSLA stock has seen a very serious shift in sentiment, for one, but also has revealed its long-term challenges in real terms to investors.
Those challenges are, obviously, how Tesla Motors can continue to increase both production capacity and sales… but also whether Tesla stock is truly making the right move with its massive “gigafactory” battery plant.
Because while the massive battery plant grabs a lot of headlines, it could be a massive time-and-money suck that takes away from the company’s immediate goal of connecting with electric vehicle purchasers.
It’s a big risk, and one that could end very badly for TSLA stock investors. Here’s why:
TSLA Stock – Dependent on Battery Business
Tesla is planning to build one of the world’s largest factories — period — right here in the U.S. That alone is noteworthy, because the estimated $5 billion “gigafactory” is a massive influx of capital to whatever state it lands in and to the nation at large, which has seen so many manufacturing operations offshored over the last few decades.
Click to Enlarge But here’s the thing: Tesla is not just banking on massive electric vehicle (and thus battery) demand to support the factory, it’s also pivoting away from its core EV business to build this facility.
Not a single Tesla vehicle will be built here — and TSLA stock holders need to know that before they get all giddy at the idea of this battery factory.
Furthermore, even if the battery demand exists, it’s important to note that completion will not be until 2017, and won’t run at full capacity until 2020. And even then, there’s no guarantee that the demand will be so strong that Tesla stock holders will see the gigafactory operating at a great margin once it fires up the assembly lines.
Remember when oversupply of solar cells resulted in plummeting prices and razor-thin margins for the industry, forcing more than a few solar stocks to go bankrupt? Well, what will happen if electric vehicles remain a largely niche product but Tesla fires up its gigafactory and the result is a massive glut in lithium-ion batteries?
In fact, this is partially what Tesla is banking on — because an easing in global supply would keep prices down and allow for cheaper, mass-market autos.
But while that’s wonderful for the driving public … is that good news for TSLA stock holders, particularly if they have exposure both to the gigafactory and to the lower-margin electric vehicles that will be produced as a result?
The only way to make up for this intentional oversupply and fall in prices is with volume… and just six years between now and the gigafactory’s planned operation at full capacity leaves a rather ambitious ramp for sales that might not come to pass.
And if the TSLA battery facility is not running at capacity? Well, the cash burn of a partially idle factory of this size is even worse to speculate about.
TSLA Skeptics Abound
There are also what-ifs about the technological advances that can happen between now and the gigafactory’s launch. According to some alternative energy experts quoted in the Wall Street Journal recently, manufacturing is “an already perfected business; just doubling the world production wouldn’t get that much improvement per unit.”
And if Tesla is successful in the buildout, the company also is banking on some rather impressive technological innovations to improve both the charging capacity and more efficient fabrication of lithium ion batteries — or heck, some alternative to lithium that might come down the road.
Also quoted in the WSJ is a researcher at Northeastern University who says we still don’t even have an idea of the next generation batteries some Tesla stock investors expect the gigafactory to produce. And the fact that we haven’t invented any viable improvement yet is proof positive that Tesla won’t have these new technologies by 2020 — because any lab work, safety tests and manufacturing rollout is assuredly going to take some time.
All this is a big burden of doubt to overcome. And when you couple these long-term risks with other problems that have cropped up for TSLA stock lately, including a disappointing earnings report and forward guidance, it seems like the skeptics outnumber the believers.
Now, that could mean anyone who buys now will get a great price and be validated by big profits down the road …
But any Tesla stock investors who puts more money into TSLA around $200 a share better be honest about what they are getting into.
Not only is short-term momentum negative, but the battery boondoggle known as the gigafactory could create long-term headaches for any buy-and-hold types out there.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.