Since Tesla (NASDAQ:TSLA) stock started scaling production, the question for potential investors has become whether this is a car stock or a tech stock.
If it’s a tech stock, it’s dirt cheap. Sales roughly doubled from 2017 to 2018, and after the first quarter they were on pace to double again. Tesla is doing this at scale, with revenue for the first quarter alone at over $4.5 billion.
If it’s an auto stock, it’s frightfully expensive. Tesla opened for trade June 17 with a market cap of $38.2 billion on trailing-year sales of $21 billion. Auto stocks like General Motors (NYSE:GM) have traded this whole decade at roughly one-third sales, even with big earnings and dividends that yield 4.56% if you buy today.
So far in 2019, investors are calling Tesla a car stock. The shares are down 38% and skepticism about the company’s future is growing. But is that fall a buying opportunity?
Tesla was launched in 2003 in an impossible dream, to produce a luxury electric car (at scale) and the battery that went into it. Later it added a second goal, to make that car capable of driving itself.
Tesla has done all that. Tesla has succeeded so well that its goals are now shared by the entire industry, and now impact all price levels. Volkswagen (OTCMKTS:VLKAY), whose diesel engines were the dirtiest in the industry, is now fully committed to Tesla-izing itself, with Chinese help. So is the rest of the auto pack.
In its first-quarter report, released in April, about 20% of Tesla’s revenue came from things other than cars. Tesla services, Tesla solar panels and (especially) Tesla batteries all contributes. The battery operations are even profitable. But their contribution hasn’t changed — Tesla remains a car company, and the solar panels are a sore point. The design keeps changing and the price keeps rising.
Tesla’s hope for continued growth is its Model 3 sedan, designed to cost $35,000. This may be the source of the bearishness. Questions have emerged about Tesla production levels, quality and demand. CEO Elon Musk insisted at this month’s shareholder meeting that demand is not a problem.
Tesla Stock and the China Card
There is another card in the Tesla deck: the China card.
Tesla owners in China are volunteering to help speed up deliveries, since the company is closing its dealer network. And its Chinese-owned Shanghai factory is already having production equipment installed. Hopes are it will produce 3,000 cars per week by the end of the year. The U.S. factory seems to have hit its production limit at 7,000 cars per week.
The Bottom Line
Tesla shares bottomed in May at levels last seen in 2016.
The company has never made money. Capital gains have been the only reason to buy the shares. Traders have done much better with Tesla than any other auto stock, as it has been highly volatile.
But I’m an investor. I like to buy good stocks, put them away for five years, and see a profit at the end of that time. In June of 2014 Tesla was selling at about $230 per share, $15 more than its current price.
For speculators, then, the party’s over. Investors need to ask themselves if Tesla can scale, if Tesla can find a profit, if the battery and solar panel operations will ever contribute, and if China can be a significant boost.
All that may happen, but I’m not putting any money on it. That GM dividend should have paid back one-fourth of my investment by that time.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.