In the day-to-day debate over Tesla Motors Inc (NASDAQ:TSLA) as an investment, it’s easy to lose track of the bigger picture. While quarterly earnings reports and the latest press releases are important to the motion of TSLA stock, let’s zoom out for a minute.
Elon Musk is a certifiable genius, and if all goes according to plan, his network of companies — Tesla, SolarCity Corp (NASDAQ:SCTY) and SpaceX — will become an empire. If expectations in fact become reality, Tesla stock owners should do very well for themselves. However, there are quite a few things that could cause Tesla’s long-term plans to veer off course.
Here are the biggest risks you need to watch if you own TSLA stock.
Risks to TSLA Stock: Low Energy Prices
Much of the recent enthusiasm for electric cars arose from high gasoline prices. When you’re staring down the barrel of $4-per-gallon gas, you think a lot about alternatives.
However, with gas costing roughly half that nowadays, that savings proposition doesn’t so great.
That’s not all bad news for Tesla, of course, which sells higher-end vehicles that are pitched to a class of consumer wealthy enough to not lose sleep over gas prices. However, gas prices certainly will slow adoption of cheaper mass-market vehicle models like the Model 3, and also potentially curtail the development of electric vehicle support infrastructure.
On top of that, Tesla’s proposed merger partner, SolarCity, stands to lose heavily if energy prices stay low. Oil and natural gas, while not perfectly substitutable goods, largely trade together. The energy boom in the U.S. unleashed large quantities of both oil and natural gas. And natgas also slumped, like oil, by more than 50%.
That makes solar less competitive, hurting SolarCity’s economic position.
Risks to TSLA Stock: CEO Distraction
Elon Musk is a smart man, but he’s a busy man, too. Great inventors throughout history have much more spotty records as entrepreneurs. The life story of the company’s namesake, Nikola Tesla, is a good reminder that genius doesn’t necessarily lead to profits.
Between Tesla and SolarCity, SpaceX, the Hyperloop, Mars colonization and who knows what else, Musk is working on more than a full slate of world-changing projects. That’s great for society, but not so great for Tesla stock. The company is led by a visionary who sees the big picture, but is up against automotive companies with decades of experience in doing one job efficiently.
Visionaries often lose when up against managers with stronger execution skills.
Risks to TSLA Stock: Solar Roof Isn’t Ready
SolarCity recently announced its new solar roof with great fanfare. And sure, the presentation seemed amazing if you just looked at the visuals.
But the lack of details about pricing, power output and other such specifications suggested there was an ulterior motive at work for presenting the solar roof now.
It’s not like this is the first solar roof either; other companies offered solar roofs previously. Most went bust, since the product wasn’t economically viable.
No, it seems the motive for this announcement is to get the Tesla-SolarCity merger approved.
Since the solar roof won’t likely go into production for another year and sales will be minimal at least until 2018, what’s the point of announcing now unless you are trying to woo Tesla stockholders?
The fact remains that SCTY’s business model is unproven. They are investing tons of money upfront on installations with the hope of making it back at a modest profit later. To keep things going, Tesla would have to dump tons more money into the company, and it’s not like Tesla doesn’t have capital needs of its own.
The Tesla/SolarCity merger has an unseemly feel that Musk is looking out for his own interests rather than TSLA stock owners.
Risks to TSLA Stock: Cash Shortage
We mentioned this above, but should the SolarCity merger succeed, the combined entity will require mountains of cash to keep functioning. Famed short seller Jim Chanos, who toppled Enron, tabs the figure at $1 billion per quarter. The combined entities already carry close to $6 billion in debt.
As long as Tesla stock remains well-valued, Musk can continue to issue more shares to cover much of the firm’s capital needs. However, sooner or later, the market will grow weary of this kind of cash burn. Tesla as a standalone operation could probably keep raising capital from the market at reasonable prices for several more years. But the SolarCity merger, which to many folks already feels like a bailout, will make it more difficult for the combined company to meet its cash needs.
A great vision will fail if the business doesn’t have the resources to bring it to fruition. Tesla is in danger of running out of capital before it can reach sustainability.
This topic came up in Tuesday’s conference call discussing Tesla’s earnings and the merger. Analysts probed Mr. Musk, asking if the merged companies would remain separate or how exactly finances would be structured. Musk responded boldly that: “I see zero chance of SolarCity going bankrupt,” and that the combined entity would be just one company.
That’s great if things work out, but it places a lot more risk with TSLA stock than had been there previously. Shares of both SolarCity and Tesla are trading somewhat lower following that conference call.
Risks to TSLA Stock: Underpowered Batteries
Tesla’s biggest issue, in the longer run, may be its battery packs. Lithium ion battery technology simply isn’t capable of delivering the sorts of results that a mass-market electric vehicle would need.
Range is a major issue. Sure, some people don’t mind limited range. But mass adoption of electric vehicles needs a solution that allows longer trips without long charging delays. It’s worth remembering that current lithium ion batteries aren’t nearly as energy-dense as gasoline, meaning it takes far more space inside a vehicle to produce the same amount of stored energy as gas. Marginal improvements won’t solve the problem, a major breakthrough must occur.
Moreover, would-be Tesla owners now have to wonder about Tesla moving away from free Supercharging, as the company today confirmed the existence of a new “Supercharging credit program,” to be rolled out next year. Even if, as Musk says, it will “cost less than the price of filling up a comparable gas car.”
Verdict on Tesla Stock
TSLA has delivered great returns in past years. And there’s still a great story here; if Musk can deliver, investors will be thrilled.
But keep these five risks in mind, as any has the potential to derail the firm in coming quarters.
As of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
