Tesla Inc (NASDAQ:TSLA) has found itself in an uncertain position. The company’s battery-related innovations have pushed TSLA stock to record highs. However, continued losses and production delays have cast doubt upon the company.
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The mountainous Tesla stock price and company-related problems leave little clarity on how investors should react.
Many investors reserve funds for speculative buys, or “gambling” as some would call it. Ultimately, the propensity of TSLA’s stock price makes this stock a buy, but only with funds reserved for speculation.
To be sure, few doubt the game-changing nature of Tesla’s creations. The Tesla Model 3, priced at $35,000, brings electric cars within middle-class price ranges. The company is also working to apply its battery-related innovations to large trucks and solar roof panels. Also, its current power generation systems could restore power to Puerto Rico.
TSLA Stock: Concerning Valuation and Metrics
The stock becomes risky when you consider its valuation. The Tesla stock price stands at over $340 per share. From an automobile production perspective, the fundamentals do not justify this valuation. General Motors Company (NYSE:GM) produces about 100 times as many cars as, while Ford Motor Company (NYSE:F) produces 60 times as many. TSLA has a market capitalization of around $60 billion vs. just under $65 billion for GM and $49 billion for Ford.
Moreover, the company is not expected to report a profit until at least 2019. Other measurements, such as return-on-assets (ROA), return-on-equity (ROE) and free cash flow remain negative. The only financial metric that’s driving the stock price is year-over-year revenue growth, which has averaged over 100% in the past five years.
Tesla Continues to Be Speculative
Most of the reported financial trends have been in place since the company launched its initial public offering (IPO) in June 2010. Investors who purchased TSLA stock at its original IPO price of $17 per share enjoyed huge profits. Unfortunately for new investors, speculative approach to the company makes the Tesla stock price difficult to predict.
Given the uncertain nature of TSLA stock, a buy makes sense with gambling money, or funds one can afford to lose.
Wall Street critics often deride the stock market as a casino. Admittedly, those who buy Tesla stock have a comparative lack of information to base their investment thesis. The difference between a bet on a blackjack hand and TSLA is investors can bet everything without losing it all. Buyers can set a limit order to protect most of their investment capital if the trade goes south.
Why the Bull Case for Tesla Stock Remains
Despite all the risk, the bull case for TSLA stock still exists. If Puerto Rico allows Tesla to deal with power issues, the company could turn most of Puerto Rico’s 3.5 million residents into customers. Additionally, Tesla Solar Roof has the potential to compete with electric utilities such as Duke Energy Corp (NYSE:DUK) or Southern Co (NYSE:SO) — a prospect that was once very expensive.
Analyst Romit Shah adds to the bullish case by giving the stock a 12-month price target of $500 per share of Tesla stock. And as mentioned before, the stock has defied fundamentals for most of its history. Due to the company’s inventions, many analysts expect the stock to continue increasing in value.
Yet, problems still exist, and they shouldn’t be ignored completely. The company recently delayed its unveiling of the Tesla Semi due to production delays on the Model 3. Further missteps could send downward pressure on the Tesla stock price. Also, the constant danger that investors will start caring about the lack of profitability remains.
The dot-com boom of the 1990’s saw many high-flying, money-losing stocks lose most or all their value once the stock market bubble burst. Tesla could easily follow in those footsteps if investors lose confidence in the company.
The Bottom Line: Given valuations and production uncertainties, TSLA stock is a suitable purchase only with speculative funds. The company’s technology poses competitive threats to stocks once thought to have wide moats; however, financial losses and production-related issues call into question Tesla’s ability to deliver results. Still, if Tesla technology powers the future, a speculative bet could charge a portfolio like it’s a Tesla battery.
As of this writing, Will Healy did not hold a position in any of the aforementioned securities.