Since Tesla Inc (NASDAQ:TSLA) was founded in 2003, it has raised close to $8 billion in equity from early investors and when it went public. It had nearly $6 billion in debt as of the end of last year. In just over seven years, TSLA stock increased 1,653% in value. But that’s all been on speculation.
So far, Tesla has lost $3 billion, or a rather large negative return off the total invested capital. But changing the world was never going to be cheap. For investors, future returns now depend on the company truly revolutionizing the electric car and solar energy marketplaces.
To scale and get auto production to where it is profitable, Tesla is opening new retail locations to sell its cars. Founder Elon Musk offered attendees at the annual shareholder meeting detailed plans for at least 660 stores in the U.S., or one store for every 330,000 licensed drivers in the country.
He foresees thousands of stores in China, and even more around the globe, eventually.
Mass Market Delivery
The Model 3 recently started production and is intended to help bring Tesla vehicles to the mass market. The starting price — before incentives — is $35,000. Weekly production is scheduled at 5,000 vehicles and is expected to grow to 10,000 vehicles per week “at some point in 2018.”
SolarCity was brought into the Tesla fold last November for at a total purchase price of $2.1 billion. While it is a small component of TSLA’s total overall market capitalization of $56.2 billion, it’s still the largest U.S. provider of solar power systems to residential and commercial users, with 300,000 customers across the country at the time of its acquisition.
The combined company focuses on clean energy products. Tesla vehicles help reduced reliance on fossil fuels, and obviously gasoline. SolarCity definitely helps reduce the use of the utility grid, though ironically Tesla cars need to be charged and could end up increasing dependence on the grid. But low natural gas prices have helped reduced the reliance on higher-polluting coal and fossil fuels.
With the company’s many moving parts, Musk and his team must be focused on increasing production and delivering cars to customers on time. Those cars must be reliable. TSLA needs to drive down production costs.
Here Comes The Sun
Meanwhile, solar energy is moving even faster, fueled by massive investment in solar cell production in China that has driven down costs. But commercializing solar panel use is still new to consumers and businesses, and the required investment is still significant.
Tesla’s $5 billion Gigafactory is expected to produce more than 35GWh of batteries by 2020. The batteries will be used to power TSLA cars and help SolarCity customers store power on cloudy days, or whenever sun-based power proves unreliable. Fortunately, suppliers will share in the cost of building the factory.
Then there’s Tesla’s big ambitions to develop self-driving cars, in a space that is extremely competitive and includes the venture capital unit of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), and Nvidia Corporation (NASDAQ:NVDA), which builds chips to support autonomous vehicle capabilities.
The potential is certainly there, and what Tesla has already accomplished is truly remarkable. But for investors, it’s difficult to see how the economics make sense. Of course, existing TSLA stock owners have been quite pleased with the strong share price performance.
Stay on the Sidelines of TSLA Stock
Without sustainable profits or cash flow, I can’t put a reasonable valuation on the stock. Analysts project a loss of $6.06 per share this year, though Tesla could potentially break even for all of 2018. If that happens, financials could swing positive within the next few years.
But until that happens, investors might be best served staying on the sidelines — or behind the wheel of a new Model 3. That seems to be the consensus. I was surprised to see that, seven of the 27 analysts following TSLA stock have either an underweight or outright sell recommendation on the shares. Another 10 recommending simply holding the stock. That leaves only eight with either an overweight or outright buy recommendation.
I would say that is a fair conclusion.
Tesla could truly revolutionize the market for stored energy via batteries, as well as help shift automotive fuel sources from gasoline to electric. A move to solar energy from households and businesses would be incredibly beneficial to the environment and earth.
But, from an investment perspective, shareholders could just end up subsidizing these investments (and operating losses) for many years to come, only to the benefit of end customers.
Auto rivals are also well aware of the burgeoning electric car space and working furiously to develop competitors to Tesla’s offering. At only six times earnings, General Motors Company (NYSE:GM) seems a much safer play in the automotive space. It has steady profits and a 4.2% divided yield. It also has the production scale that Tesla would be lucky to one day achieve.
As of this writing, Ryan Fuhrmann was long shares of Alphabet.