Tesla Inc (NASDAQ:TSLA) was a show-me stock going into its first quarter results, and it remains a show-me stock after the results. An extraordinarily high valuation is a clear signal that TSLA stock is pricing in mass adoption of the company’s vehicles. But nothing in Tesla’s most recent earnings report — or nothing the EV maker has shown to date — can tell us that this actually will come to pass.
Given the competitive, cannibalization, tax and macro headwinds it’s facing, buying Tesla stock right now is more of a roulette spin than an investment.
Those of you who aren’t interested in Las Vegas probably shouldn’t bother with this Palo Alto product, either.
Tesla Is Built on a Pile of Hope
TSLA stock has a market valuation of $51 billion — higher than General Motors Company (NYSE:GM).
That’s despite the fact that the latter sold more than 191,000 vehicles to U.S. consumers last month alone, while Tesla estimates it will sell 47,000 to 50,000 vehicles in the first half of the year. That’s also despite the fact that while GM is already selling nearly 10 million cars a year, Tesla merely plans to produce 1 million vehicles annually by 2020. And that’s despite the fact that GM is profitable, while Tesla is not.
There are other signs that Tesla might not meet some of its expectations.
Total customer deposits for its vehicles actually dropped by more than $47 million this quarter. Furthermore, as of a year ago, the company disclosed that it had received 373,000 deposits of $1,000 for the Model 3 vehicles — less than two months of U.S. sales alone for GM, but more important, it appears the company hasn’t updated that number since May 2016, suggesting it hasn’t exactly swelled by leaps and bounds.
Tesla’s valuation isn’t based on concrete numbers, but largely on hope, and the one-of-a-kind cult personality of its CEO and founder, Elon Musk.
Musk is co-founder of a component of PayPal Holdings Inc (NASDAQ:PYPL), a founder of space exploration company SpaceX, and a man who built a new type of auto company with a fabulous, worldwide reputation from scratch an amazing individual and a towering technology guru.
But can he convince tens of millions of Americans to buy electric cars that he estimates will cost at least $42,000 per vehicle while facing significant competition? Or, alternatively, can he find a way to drastically lower the cost of his vehicles?
Those are the questions we need answers to, and we simply don’t have them.
The Tesla brand commands tremendous respect, but as alluded to above, competition is coming. By 2019, Audi, BMW, Mercedes and Jaguar will all sport new, higher-end electric vehicles. While they don’t have the EV cache of Tesla, they do have the luxury cache — so those vehicles will have draw.
And it has become apparent that Tesla is even worried about competing with itself.
In its letter to investors accompanying its results, Tesla wrote that one of its “challenges” will be to combat “a belief” it has seen “among some” that the Model 3 is “more advanced” than the Model S.
This raises the possibility that some Model S owners could buy the cheaper model for their second Tesla instead of the company’s higher-end vehicle. Or maybe some people who want to buy their first Tesla could purchase a Model 3 instead of a Model S.
If this cannibalization trend becomes widespread, it could greatly lower Tesla’s average selling price and margins.
Bottom Line on TSLA Stock
Finally, Tesla faces a couple of macro challenges.
There is a distinct possibility that the federal tax credit for electric vehicles, worth up to $7,500, will soon be eliminated. Republicans, who control both houses of Congress and have Donald Trump sitting in the White House, historically have been against alternative energy, and they’re looking to eliminate EV deductions as part of their tax reform initiative.
It’s difficult to predict the impact that the elimination of the tax would have on Tesla’s sales, but one can assume that it would be, if nothing else, negative.
Similarly, gasoline prices remain low by historical standards — oil prices are now sitting around $45 per barrel — and could very well drop further, lowering the value proposition of electric cars.
Tesla stock is pricing in skyrocketing sales that, despite the considerable talents of Elon Musk, may never come. Investors who aren’t interested in gambling should dump TSLA stock and wait for a better entry point in the name.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.