As should be no surprise, Tesla Motors Inc (NASDAQ:TSLA) had another eventful year.
The company dealt with production issues with the Model X as demand surged. Then there was the mega acquisition of SolarCity, as well as the announcement of nearly 400,000 advance deposits for the Model 3.
Now, fresh off of the holiday season, traders are bidding Tesla stock up on a deal with Panasonic Corporation (ADR) (OTCMKTS:PCRFY) to drop more than 30 billion yen (about $256 million USD) on a Tesla production facility to make photovoltaic cells and modules.
Today’s 3%-plus move exemplifies the broader theme — TSLA stock is erratic. In 2016, Tesla had a range of $144 to $265 — with the year-to-date loss coming to 8%. That’s disappointing considering the markets have ended the year on a very bullish note. It’s important to keep in mind, however, that Tesla stock has had a long run of strong gains. During the past five years, compound annual growth hit a staggering 50%.
So what kind of opportunity are we looking at with Tesla stock? Well, to see, let’s consider three pros and cons on Tesla stock.
TSLA Stock Pros
Innovation: Tesla Motors has made major breakthroughs in battery technologies (allowing for drives of over 300 miles on a single charge), electric powertrains and software systems. Yet the company has also been innovative with its business model, such as having online purchases of vehicles as well company-owned showrooms and service centers. The result is that Tesla has direct connections with its customers and better control on quality service.
Interestingly enough, a Tesla car is kind of like an app. That is, there are periodic updates to the systems with “over-the-air” transmissions. This has definitely been key with the Autopilot technology, which allows for semi-autonomous driver assistance. So is it any wonder that Forbes currently ranks Tesla as the world’s most innovative company? Not really.
Megatrend: The auto industry is in the midst of major technology changes. Companies like Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), Qualcomm, Inc. (NASDAQ:QCOM) and Intel Corporation (NASDAQ:INTC) have made big investments and acquisitions in the category. Of course, the main focus is on autonomous driving. According to research from Mobileye NV (NYSE:MBLY), the market could hit $15 billion within the next few years.
All this is certainly good news for holders of TSLA stock. The company has been investing in new-fangled auto technologies since 2003. What’s more, the Autopilot hardware has logged over 1.3 billion miles so far. In other words, Tesla has a major advantage in terms of data and analytics. But the growth is likely to ramp for some time. For the second half of 2016, TSLA expects to ship 50,000 cars, which is roughly the same amount for all of last year.
The Elon Factor: At 45, Musk is already a legend of the tech industry. Besides Tesla, he has launched other breakout companies, such as Zip2, Paypal Holdings Inc (NASDAQ:PYPL), SolarCity and SpaceX. Along the way, Musk has made billions for shareholders. Unlike many in Silicon Valley, though, he is not only technically super smart but has incredible marketing chops. Oh, and he is not afraid of “going big.” Let’s face it, how many people have the goal of eventually living on Mars? Such qualities have inspired Musk’s workforce, which has led to amazing achievements.
TSLA Stock Cons
SolarCity Deal: On Twitter Inc (NYSE:TWTR), Musk sent out the following regarding the acquisition: “Tesla + SolarCity future: solar roofs + batteries + electric cars.” Definitely ambitious, right? Of course. But there has still been quite a bit of skepticism on the Street.
One of the issues is that SolarCity has been a big-time money loser. For the past year, the company has reported nearly $2 billion in negative operating cash flows. Keep in mind that there are heavy capital costs and marketing expenditures. The competitive environment is also intense and there are concerns that the regulatory environment could get tougher. Let’s face it, the Donald Trump Administration may not be too interested in maintaining tax credits for solar energy projects.
In light of all this, analysts at Morgan Stanley provided the following grim assessment: “Given (SolarCity’s) financial condition and recent reduction in guidance, we have assumed zero value for (SolarCity) equity to (Tesla) shareholders.”
Valuation: Even with the recent drop, TSLA stock is still far from cheap. The multiple is at about six times sales. No doubt, this is at quite a premium to traditional auto manufacturers. Consider that General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) sport multiples at about 0.3 or so.
It’s true that the premium valuation for TSLA is due to the strong growth ramp. And there is lots of value for the intellectual property. But then again, profitability has remained elusive. If anything, TSLA will likely continue to voraciously raise capital to meet production targets, build the massive Gigafactory and fund SolarCity. In other words, there will likely be ongoing dilution for shareholders.
Perhaps this is why short sellers have been targeting TSLA stock. Right now, the short interest is at a hefty 40% of the float, which certainly indicates that many investors are expecting a fall in the value of the shares.
Production Issues: Demand has not really been a problem for Tesla. Instead, the real challenge has been to produce enough vehicles. After all, the company has a limited number of facilities — and technical complexities are mind-boggling. It seems inevitable that there will be snags. Yet the biggest problem may be to achieve profitability on a unit basis. According to a recent 152-slide presentation from hedge fund manager Mark Spiegel, the Tesla Model 3 could cost $48,000 to produce. However, the company has plans to sell it at $35,000!
All in all, this seems like a pretty good deal for customers — but not for holders of TSLA stock. Granted, TSLA may ultimately decide to hike the price. But this could mean a drop in sales. No doubt, this essentially highlights the extreme difficulties of succeeding in the mass market.
Bottom Line on TSLA Stock
Musk has always had many doubters — and he has had a knack for proving them wrong. And so far, he has done a tremendous job with TSLA. It’s actually downright amazing that he was somehow able to stave off bankruptcy during the financial crisis.
But going forward, TSLA will deal with its biggest challenges – such as selling into the mass market and also managing a solar energy company. Just doing one would be incredibly tough. In other words, there is really not much margin for error.
OK then, should you buy Tesla stock? No, not for now — the risks just seem to high, especially in light of the valuation.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.