The Risks and Rewards of Tesla Stock

On April 7, 2017, Tesla (NASDAQ:TSLA) stock cleared $300 for the first time. Tesla stock would close that day at $302.54. Yesterday, TSLA stock closed at $302.56.

Tesla Ends Year With More Than 3,000 Model 3s Still in Inventory: Electrek

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So over the last 22+ months, TSLA stock has risen… 0.07%. Given the intensity of the debate over TSLA — without a doubt the biggest battleground stock in the market — the lack of movement is beyond ironic.

Where does Tesla stock go from here? There are cases on both sides. I’ve long leaned toward the bearish case: I argued in December that TSLA would decline in 2019. That prediction has been right so far, with the stock down 9%. But Tesla has managed to confound the doubters so far, and there are still reasons to believe it will do so again.

The Case for Tesla Stock

At this point, the bull case for TSLA has both short-term and long-term aspects. The long-term case is the same as it’s been for years now: Tesla has the opportunity to revolutionize worldwide energy usage. The company isn’t just about the Model 3 — or even just about automobiles. The solar division, Powerwall, and other future initiatives all offer additional profit opportunities.

A $52 billion market capitalization hardly suggests Tesla stock is cheap, but it’s puny compared to what the valuation could be if Tesla achieves even some of its goals across the energy space. ARK Invest famously has put a $4,000 per share bull case price target on TSLA stock — which would suggest a valuation over $500 billion. Given that Exxon Mobil (NYSE:XOM) is worth about $375 billion, including debt, that figure perhaps isn’t as ludicrous as it sounds.

In the short term, meanwhile, Tesla stock is getting to a point where it doesn’t look that expensive. 2020 analyst EPS estimates are over $9 per share, suggesting a 33x forward P/E multiple. That’s a big number as far as auto stocks go — General Motors (NYSE:GM) and Ford Motor Company (NYSE:F) both trade in the single digits — but it’s a valuation that Tesla at least can grow into. As the company expands into Europe and China, its earnings should grow, and that multiple should come down.

The Case Against TSLA Stock

The case against Tesla stock is starting to build, however, and it comes down to one simple problem: trust. For all the arguments over convertible debt maturities and 25% gross margins and weekly production levels, the broad argument is rather simple.

If Tesla can build cars more effectively and more efficiently than existing manufacturers, TSLA stock probably rises. It will make more money per car than anyone else — and enough to fund its moves into semi trucks, energy storage, and other areas.

If it doesn’t, TSLA stock falls. Auto companies aren’t valued at 30x earnings — or even 20x. Earnings expectations come down, multiples compress, and the Tesla stock price comes down significantly. And so far, we’re simply not seeing much evidence that Tesla is that much better than anyone else at production.

Tesla hasn’t released a $35K Model 3 yet, as promised. It built vehicles in a tent. Target after target has been missed. For all the hype about the 5,000 per week production target (sort of) reached in late June, Tesla hasn’t been able to get back to that level on a consistent basis.

There’s a lot of big talk and big promises out of Tesla. The results — thin profitability and missed goals — haven’t been good enough yet.

The Trust Problem

And with each passing month, it becomes harder to trust Tesla and CEO Elon Musk. Musk clearly violated his settlement with the SEC with Tweets this week initially guiding for production of 500,000 cars this week.

The CEO did correct the tweet four hours later, admittedly. But for those bulls chalking the Tweet up to a simple mistake, it’s worth noting that Musk did the exact same thing on the Q4 conference call last month. He projected 350,000 to 500,000 Model 3s in 2019 — after the shareholder letter issued the same day only guided for 360,000 to 400,000.

At this point, investors perhaps don’t care. Soon after the tweet, Tesla’s general counsel resigned after two months on the job, the latest in a series of executive departures. TSLA stock dropped just 1%.

Investors should care, however. Given the goals here, execution needs to be close to perfect at worst. It hasn’t been. A CEO who continually overpromises doesn’t help on that front. Nor does the revolving door of executives.

The biggest reason to see upside in Tesla stock is the big promises — and the big hopes. The biggest risk to TSLA stock is that the company won’t deliver. For 22 months, the market hasn’t made up its mind as to which is more likely. At some point, it will. Right now, it still seems far too difficult to trust this company — and this CEO — to deliver the rewards they promise.

As of this writing, Vince Martin has no positions in any securities mentioned.

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