It’s been a bumpy ride for Tesla Motors (TSLA) stock. In just the past year, the Tesla stock price has hit $280 twice with a detour down to $180 in between.
But many analysts are still big-time bullish on Tesla stock. Just look at Adam Jonas from Morgan Stanley (MS). According to a recent research note, he pumped up the price target to a heady $465 — nearly double the current price of TSLA.
Why the bold call? Well, Jonas believes that the auto industry is undergoing seismic changes because of the emergence of self-driving cars and on-demand services like Uber, which allow for widespread ridesharing. And yes, he thinks TSLA is the best positioned to benefit from the megatrends.
OK, so is Jonas on target? Or should investors be cautious? To see, let’s consider the pros and cons for TSLA stock.
Tesla Stock Pros
Innovation on Steroids: TSLA does not think of itself as a typical auto manufacturer. Instead, the strategy is to be an innovative tech company like Google (GOOG, GOOGL) or Facebook (FB). The result is that TSLA has seen lots of traction with its high-tech cars, particularly the Model S. As a testament to the car’s capabilities, Motor Trend named the Model S the Car of the Year for 2013 and Consumer Reports gave it the highest satisfaction score of any car for the year. TSLA has also been unique with its distribution. For example, the company owns its own sales and service network. By doing this, TSLA has more control over quality of service — and also has better sense of consumer tastes and interests.
Add-On Opportunities: As Amazon (AMZN) has shown, leveraging it massive infrastructure to build standout offerings like Amazon Web Services can be a nice driver for growth. TSLA is taking the same kind of track. With its engineering expertise in battery technologies — and its scale from manufacturing — the company has entered the stationary energy storage business. TSLA also has a thriving business selling its powertrain systems to other auto manufacturers, like Daimler. Such business are still relatively small, but over the long haul, they could certainly help keep up the growth rate.
Elon Musk: The co-founder and CEO of TSLA is also one of the world’s top entrepreneurs, perhaps even rivaling the legendary Steve Jobs of Apple (AAPL). When it comes to Musk’s track record, there are few blemishes. He has made shareholders substantial amounts with startups like Zip2, PayPal (PYPL) and SolarCity (SCTY). Musk has a penchant for reimagining things — and has the guts to make big bets. As a result, he has the credibility to attract some of the world’s best engineering talent, which is definitely key in today’s relentless competitive global market.
Tesla Stock Cons
Production and Engineering Challenges: Tesla’s innovation does pose risks. After all, the company’s cars are extremely complicated, which can result in prolonged delays — as we’re seeing with the Model X. TSLA has had lots of issues with the interior of the car. According to Musk:
“Our biggest challenges are with the second-row seat. It’s an amazing seat, a sculptural work of art, but a very tricky thing to get right.”
But sophisticated cars also can mean more issues with production. Again, this appears to be the situation with the Model X. In fact, in the latest earnings report, TSLA indicated that 2015 product will be 50,000 to 55,000 compared to the original estimate of 55,000. And it won’t be a temporary deceleration, either. For 2016, TSLA reduced its monthly production estimate from 2,000 to a range of 1,600 to 1,800.
Valuation: Tesla stock is far from cheap, with a price-to-sales ratio of 8.75. As should be no surprise, the rest of the auto industry is trading at much lower multiples. For example, Ford’s (F) is at 0.4 times sales and GM’s (GM) multiple is 0.3. True, Tesla is a unique, fast-growing company, but it still needs huge amounts of capital to operate. Since going public in 2010, TSLA has gone out to raise additional capital four times, with the latest offering announced last week. Besides, TSLA is not expected to reach profitability until 2020.
Macro Issues: The global economy is looking shaky, especially as China shows desperation by cutting interest rates and devaluing currency. This slide is likely to reverberate across the world, which could put pressure on car sales for Tesla. But another issue is the plunge in the price of crude. After all, one of the selling points of a TSLA is its fuel efficiency — yet the benefit isn’t so great anymore. This is especially concerning for the Model X, which is focused on the mainstream customer.
Bottom Line On Tesla Stock
Musk has definitely made tremendous strides with TSLA. But given the valuation of the Tesla stock price, Wall Street is already factoring in a good deal of the potential.
So even a little bit of bad news could hit Tesla pretty hard. Let’s face it, TSLA faces considerable risks with production, the consumer acceptance of the Model X and the impact of the global economy. What’s more, TSLA stock has already proved to be quite volatile over the years.
So, should you buy Tesla stock? No, not for now — the valuation is too robust and is vulnerable to an array of risk factors.
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.