The chaos at Tesla (NASDAQ:TSLA) continues. Tesla stock finds itself stuck in a trading range as production glitches, management turnover, falling bond prices, and investigations hamper the equity.Still, the stock price remains at a high level despite the turmoil.
Analysts project profitability for the company by 2020. If the company can start making money, it could thrive. However, with the costs and risks current holders of Tesla stock have to endure to reach that point, the level of risk probably outweighs the potential returns.
Elon Musk: Great Visionary, Poor Leader
What amazes me most about Tesla is its ability to thrive. It produces less than 2% of the number of vehicles manufactured by GM (NYSE:GM) (and not necessarily well), but supports a higher market cap than the venerable auto giant.
It accomplishes such a feat despite its visionary but unstable leader. Yes, Elon Musk has made strides in improving battery technology and produced an appealing luxury vehicle. Also, if other products such as Tesla Solar Roof find more widespread acceptance, that would also bolster the company’s bottom line.
However, missed production quotas and the high turnover in company management have called Musk’s business acumen into question.
He hurt his reputation further with a cryptic tweet that has inspired an investigation by the Securities and Exchange Commission (SEC). After all that, you would think that smoking weed on camera might not make the best impression. Yet, he also chose to do just that.
While such an action in today’s environment might send Tilray (NASDAQ:TLRY) stock 25% higher, it will probably have no such positive effect on Tesla. As I alluded to in a previous article, Musk chose well in naming the company after legendary engineer and physicist Nikola Tesla.
The company Tesla reflects Tesla’s legacy of innovation. Unfortunately, the company also reflects Mr. Tesla’s lack of business sense. Despite his creative scientific mind, Nikola Tesla died broke. The company bearing his name could easily find itself on the same financial path.
The Balance Sheet and Tesla stock
The balance sheet looks troubled by any measure. As of the end of the second quarter, Tesla held $3.9 billion in stockholders’ equity. Unfortunately, short and long-term debt amount to more than $11.6 billion. This probably explains why Tesla bond prices fell to record lows earlier this month.
However, this company may have a saving grace. The balance sheet lists the company’s value at $3.9 billion. Yet, thanks to the market, the company’s market cap value has reached over $51 billion.
Moreover, a projection of a $7.39 per share profit in 2020 leaves TSLA with a light at the end of the tunnel. If the company can maintain this market cap and dilute the stock as needed until it reaches profitability, it could save itself.
Also, this would place the 2020 forward price-to-earnings (PE) ratio at about 40 when measured against today’s price. If Tesla stock maintains its popularity, this multiple likely will climb much higher.
Risks Outweigh Rewards
This strategy comes at the expense of current holders of Tesla stock. While shareholders would find this scenario preferable to letting the stock fall to $0, it devalues their shares nonetheless. And even if net income turns positive, the company will still have to service billions in debt.
It also comes at a great expense for those who want to bet on this possible outcome now. At about 13 times the book value, this proposition does not compensate investors well for this risk.
If one wants to take such a chance, they can see much higher potential in a stock like Chesapeake Energy (NYSE:CHK). The natural gas firm may hold negative equity, but it only trades at 5.4 times forward earnings. And at just over $4 per share, it could go higher by several multiples if it escapes its daunting debt situation.
The current situation asks holders of Tesla stock to make a similar bet at a much higher cost. While Tesla may ultimately succeed, a higher potential for profit lies elsewhere.
The Bottom Line on Tesla Stock
Tesla stock could thrive if the company becomes profitable, but shareholders must endure a high level of risk for a comparatively meager return to reach that point.
One of the most visionary minds in the tech industry backs up Tesla stock. Unfortunately, this genius does not translate into management stability.
Analysts see a path to profitability if the company can hold on until 2020. However, low bond prices and a high stock price mean the likely path to 2020 will be paved by stock dilution.
Moreover, the TSLA stock price remains so high that success will leave investors with a lower percentage return than with a penny stock. Time will tell whether Tesla stock makes shareholders more money.
Still, given the high risks for that potential return, investors will probably see higher profits speculating elsewhere.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.