Markets like calm and that is particularly true when it comes to Tesla (NASDAQ:TSLA). Tesla stock often is volatile to in large part to CEO Elon Musk having a penchant for the controversial and flamboyant.
At one point on Wednesday, Sept. 11, Tesla stock was higher by about 5% as the shares paced for their best intraday performance in seven weeks, extending the stock’s September gain to 8%.
That after Tesla stock dipped 7% in August. A simple tweet from Musk noting that Tesla’s flagship Model S recently set the record for fastest four-door car at the Laguna Seca Raceway seemed to be the catalyst for Tesla stock on Wednesday.
Of course, there’s much more to the story than that and investors should not caught up in something as superficial as an automotive test. Much of the Tesla story is a demand/production story, meaning can the company produce cars at a rapid enough rate to meet current demand and lure more luxury car buyers away from internal combustion engines (ICE) to electric vehicles.
There are signs electric vehicle demand is growing, as expected. For example, Chilean lithium producer SQM recently said it plans to invest $2.1 billion over the next five years to bolster production of the material that is a vital ingredient in the production of the ion batteries that power electric vehicles.
Additionally, a recent permit application with the city of Fremont, Calif., Tesla’s headquarters, indicates the company is looking to build another assembly line, which could be used to manufacture the Model Y crossover vehicle slated to debut in 2020.
Reasons to Cheer and Be Skeptical
Few companies divide investors the way Tesla does. Twitter shouldn’t be the only source of investment decisions for investors, but in the so-called “FinTwit” space, the segment of the social media platform where money managers and pundits dwell, an investor is just as likely to find some noted folks saying Tesla stock is a four-digit name in the future as they are to find someone referring to the stock by the ticker “TSLAQ” with the “Q” referencing a bankrupt company.
Tesla management has previously been prone to bombastic claims regarding cash flow and production targets, so some skepticism is warranted.
“2019 delivery guidance remains 360,000-400,000 vehicles and management said it feels the company is self-funding and able to generate free cash flow except possibly during product launches such as the Model Y crossover next fall,” said Morningstar in a recent note. “We have heard this assertion on self-sufficiency as recently as late last year and then Tesla raised capital in 2019 so we are somewhat skeptical.”
Conversely, the company has its supporters, including JMP analyst Joseph Osha, who rates Tesla stock “outperform” with a price target of $337, about 40% above the Wednesday, Sept. 11 close. The analyst likes Tesla’s market position and views rival offerings as “weak.”
Speaking of market position, integral to the Tesla stock thesis is understanding what market the company operates. This is a luxury car company with comps being Lexus, BMW or Mercedes, not a mass-market maker like Chevy, Honda or Toyota.
“Tesla has a chance to be the dominant electric vehicle firm and is a leader in autonomous vehicle technology, but we do not see it having mass-market volume for at least another decade,” said Morningstar. “Tesla’s product plans for now do not mean an electric vehicle for every consumer who wants one, because the prices are too high.”
Bottom Line Tesla Stock
At 42.37x forward earnings, Tesla stock is certainly a growth name and that would be a hurdle unto itself if value stocks continue rebounding.
More specific to the Tesla stock thesis is what investors’ tolerance level will be for the company’s spending plans, which could require capital raises. The company is building a gigafactory in Nevada, as noted above is planning a Fremont, Calif. expansion and must effectively integrate SolarCity into its fold. None of those efforts will come cheap and they don’t include new vehicle launches, such as the Tesla pickup truck.
Tesla’s room for growth is compelling, but the company’s ability to manage the cost of that growth is something investors must be aware of going forward.
Todd Shriber does not own any of the aforementioned securities.