For Tesla Inc (NASDAQ:TSLA), 2018 is a critical year. Tesla stock had a strong, if choppy, 2017, gaining 46%. But those gains were minimized by a year-end pullback: TSLA stock closed the year down roughly 20% from September highs.
As I’ve written before, Tesla stock is all about confidence. Tesla stock predictions — bearish or bullish — are guesses at revenues and profits years into the future. It’s why investors on both sides should be humble — Tesla is a stock that can move for you, or against you, at a moment’s notice.
But as 2017 rolled on, I worried that the market was losing confidence in Tesla stock; and I still believe that’s the case heading into the New Year. An early December rally fizzled quickly. Investors still haven’t moved past the missed production targets for the Model 3, the latest in a long string of broken promises.
Longer-term, the story still has plenty of time to play out. But as far as 2018 goes, there seem a lot more things that can wrong for Tesla than can go right.
The retort from any TSLA stockholder regarding concerns about the Model 3 is simple: Tesla has been here before. Model S and Model X production took time to ramp as well. Targets were missed. But Tesla eventually got where it needed to go. The same will be true for the Model 3.
This argument makes some sense — but the environment is different. The Model 3 is Tesla’s mass-market car. It’s the vehicle on which the bull case for TSLA stock — particularly at a $53 billion valuation — rests. It is supposed to expand Tesla’s customer base from well-off early adopters to customers simply looking for an attractive everyday vehicle. The same timeline as that for more niche offerings like the S and X simply may not be good enough for the 3.
Meanwhile, at these levels, simply getting cars to market isn’t good enough, either. Tesla needs to prove that it can manufacture successfully, and profitably, at scale. It’s worth pointing out that the recent pullback in TSLA stock started with a Jefferies downgrade in September. One key concern analyst Philippe Houchois raised was whether Tesla’s 30% gross margin target was achievable.
That target isn’t based just on getting well-built Model 3s out the door. It’s based on a supremely efficient manufacturing process that’s an improvement over current methods. Tesla hasn’t proven that capability yet — and it will need to in 2018 to keep more analysts, and investors, from sharing those concerns.
Secondly, the Model 3’s mass market nature means it’s competing more directly against both ICE (internal combustion engine) and electric vehicles from competitors. That competition means time is of the essence. It’s not a coincidence that while TSLA stock has declined, rivals have gained.
Indeed, over the past six months, Tesla stock has fallen 14%, while Toyota Motor Corp (ADR) (NYSE:TM) has gained 21%, General Motors Company (NYSE:GM) has risen 17% and even long-struggling Ford Motor Company (NYSE:F) is up 12%.
Investors are worried that Tesla is losing ground.
Concerns seem to be mounting. And I question what Tesla has left to drive optimism toward TSLA stock in 2018. Model 3 problems are going to linger for some time — KeyBanc lowered its delivery estimates just last week, sending Tesla stock even lower.
Tesla CEO Elon Musk has tried to get investors excited with the Tesla semi, which has generated interest from Wal-Mart Stores Inc (NYSE:WMT), United Parcel Service, Inc. (NYSE:UPS) and PepsiCo, Inc. (NYSE:PEP), among many others. But that’s not coming until 2019 at the earliest (assuming Tesla hits its deadlines). The pickup truck Musk teased last month is even further out, after the so-called Model Y.
Again, this is a stock based on confidence — a “story” stock. And I’m not sure Tesla’s 2018 story will quite live up to that of past years. Model 3 production questions will last the entire year, given that production needs to ramp just to fill existing orders. Competitors are going to have their own models coming to market, including the Chevy Bolt EV and the updated (and upgraded) Nissan Leaf.
And the products driving future revenue and profits aren’t going to make much of a dent in the meantime.
Barring a major surprise from SolarCity, I’m not sure there’s a positive trajectory change coming in the next couple of quarters.
Considering this is a company valued at $53 billion with negative cash flow, that seems a significant near-term risk. Combined with what looks like a relatively weak chart, it portends a troublesome 2018 for Tesla stock.
Longer-term, Musk may still fulfill his goal of revolutionizing the automotive industry. But it always was going to be a bumpy road, and 2018 may be bumpier than it’s been for Tesla in quite a while.
As of this writing, Vince Martin has no positions in any securities mentioned.