Tesla Motors Inc (NASDAQ:TSLA) may be the most overwritten story on Wall Street. But no one ever seems to get the story quite right. Writers describe shiny objects, and not the real situation that investors in Tesla stock face.
It’s not about new models. It’s not about buying SolarCity Corp (NASDAQ:SCTY). It’s not about Elon Musk being a Bond villain, about SpaceX and visions of powering your own super-fast electric car without gasoline.
It’s about boring ol’ scaling. And what Tesla stock may be worth even if it succeeds at it.
The Problem of Scaling
Tesla has proven many things, and it has made many promises. What it doesn’t talk about is its key challenge — scaling production from just over 200 units per day to over 5,500 units per day. It’s the one thing Detroit and its overseas competitors know how to do, and it’s the one thing Tesla has yet to prove it can do.
Tesla has promised investors that it will produce 500,000 cars in 2018. It introduced its long-awaited “affordable” version, the Model 3, and almost immediately got 400,000 pre-orders, each one wrapped with a $1,000 check.
During the second quarter, however, Tesla produced exactly 18,345 vehicles. That’s more than the 14,820 produced in the first quarter, but well below its target of 20,000.
Getting from 20,000 cars per quarter to 125,000 cars per quarter means going from producing about a car every five minutes to a car every minute. That’s three shifts, including weekends, a car every minute for 90 days to get to 125,000 in a quarter.
Even at its present production rate, Tesla’s robots are going flat-out. They won’t complain about going faster, but they could break, and if one breaks, the whole line is out until the problem is repaired. Downtime just has to be built into the schedule. Suppliers are also questioning whether they are up to the challenge.
Tesla says it is hiring new, human workers and that the Model 3 will be easier to build than its predecessors. TSLA has even hired a senior executive from Audi to oversee production.
But Musk himself knows how big a challenge he faces. He is already sleeping at the factory some nights, worried about current production targets.
Tesla also says now that it will be more than a car company. It is opening its first “Gigafactory” to produce batteries for cars and homes and will soon complete its SolarCity “gigafactory” in Buffalo, NY to produce solar panels.
But, again, will these facilities work at the production pace Tesla has promised? That remains an open question.
What If It Works?
Even if everything works, what are you buying?
Tesla stock currently has a market cap of nearly $34 billion, while generating sales of $4 billion and losing money on every sale. Sales of 500,000 cars at $35,000 each would generate $17.5 billion in sales, for the year. Maybe these will even be profitable sales.
Ford Motor Company (NYSE:F), by contrast, generates $150 billion in sales each year. Its profits of nearly $7.4 billion last year are valued at less than $50 billion by the stock market. The current price-to-earnings ratio is 5.5.
The Ford-Tesla valuation is a popular argument to float, and the typical argument back is that Tesla has far more growth potential. That’s a fair point. But consider this:
Even if Tesla achieves its goals, it’s still one-tenth the size of Ford — a company whose earnings are seen as nearly worthless because they are highly vulnerable to an economic downturn.
And even if Tesla achieves its goals, is Ford (or pick your other favorite automaker) going to stand still? Nope. In fact, Ford says it will have an autonomous, self-driving car on the market in five years and has put $4.5 billion into its own electric car line.
Bottom Line on Tesla Stock
It just does not add up for Tesla stock bulls. Failure is possible, and success is not valued.
Tesla Motors desperately needs to keep its image positive, because it keeps having to do secondary offerings of stock to meet its capital budget requirements. Its most recent secondary came out at $215 per share, against an August 2015 price of $242 and an all-time high of over $286.
Still want to buy Tesla stock?
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in any company mentioned in this article.
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