There’s not a stock in the market with a more pitched bull and bear divide than Tesla (NASDAQ:TSLA) stock. Bulls cite a massive growth opportunity — and a company that can help improve life on Earth. Bears point to the company’s lack of profitability, a long list of broken promises and an arguably inflated valuation.
I’ve long leaned toward the bearish side of the argument (and taken bearish option positions in the stock, though I’m currently on the sidelines) for one simple reason: I don’t trust its management. That concern isn’t really based on the arguments over the infamous “funding secured” tweet and the still-lengthening list of broken promises.
Rather, it comes down to the fact that auto manufacturing is a notoriously difficult and capital-intensive business. As both TSLA bulls and bears will point out (for very different reasons), among U.S. manufacturers, only Tesla and Ford (NYSE:F) have never gone bankrupt.
Yet Tesla, drama aside, has hardly executed well — or, in my opinion, been managed well. The company announced in late February it was closing all its stores, then reversed field two weeks later. Prices constantly move around. The decision to avoid model years has created issues in parts and services. This is too difficult an industry to not have detailed strategies and top-notch execution.
TSLA bulls for the most part have been forgiving, and chosen to put their faith in CEO Elon Musk. At this point, I wonder whether it’s still possible to ignore his critics.
Do You Believe in Robo-Taxis?
At Tesla’s Autonomy Day in April, Musk said the company was on its way to fully autonomous driving. He announced that the company would have 1 million “robo-taxis” on the road by the end of 2020.
Musk doubled down on that claim on an investor call a little over a week later. He told listeners that in three years existing Tesla models would be worth $150,000-$250,000. In July, that figure came down a bit, but on Twitter Musk still put the value at $100,000-$200,000.
So a key question for anyone considering Tesla stock is this: Do you believe those claims?
Few do. TSLA stock actually declined 4% in trading on the day of the Autonomy Day (though, to be fair, it regained those losses the following session). Noted TSLA bull Gene Munster of Loup Ventures said in the context of Apple (NASDAQ:AAPL) that “autonomy is going to take longer than people think.” Most auto executives believe it will be at least a decade. Autonomy leader Waymo, a unit of Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), believes it’s even further away.
In fact, it certainly doesn’t seem like Tesla itself believes its CEO. After all, the company is cutting the price of both the Model 3 and the Model Y. Why, exactly, is Tesla selling “appreciating assets,” as Musk termed them, for 40% of the company’s low estimate of their value? Tesla closed the second quarter with $5 billion in cash. Surely, it could lower deliveries and either sell the cars at a bigger profit or keep them for an in-house fleet.
After all, Tesla is guiding for total production of 10,000 units a week by the end of the year. 500,000 units annually at $100,000 each would be worth $50 billion. That’s roughly equivalent to Tesla’s current enterprise value.
What Does That Mean for TSLA Stock?
The dubiousness of Musk’s claims in turn leads to another question: Can an investor buy Tesla stock if he or she doesn’t believe the CEO?
Obviously, many investors believe the answer is “yes.” Tesla has a large retail shareholder base. Institutions — and Wall Street analysts — in many cases have stuck behind the company, and behind TSLA stock.
And maybe the opportunity is such that the stock is worth the risk. After all, an investor could plausibly argue that even if Musk is exaggerating, TSLA stock still has upside. If the robo-taxis are worth $50,000 and won’t arrive for a few years, that still suggests potentially higher prices down the line.
That might be true. But remember: This is a brutally difficult industry. It requires huge amounts of capital (as Tesla has learned). It requires execution and strategy that are on point.
And Musk is making what appears to be a ridiculously optimistic claim about something that is a big part of the Tesla business model — and the bull case for Tesla stock. This isn’t random musing about life on Mars. The 1 million robo-taxis by next year claim was made at an event specifically designed to highlight the company’s plans in autonomy. It wasn’t an off-hand remark made on an earnings call or at a conference.
From here, if an investor can’t believe that goal, that investor can’t, and shouldn’t, own Tesla stock. For now, many investors see it differently. That may not be the case forever.
As of this writing, Vince Martin has no positions in any securities mentioned.