Wall Street, being what Wall Street is, tends to be driven by two charged obsessions: either it looks too far down the road ahead or stares in the rearview mirror, stuck in the portfolio rut known as What Could Have Been.
As for the first part of the equation, the luxury electric car company Tesla Motors (ticker: TSLA) has just taken the wraps off its Model 3. Unveiled at its Los Angeles design studio, the Model 3 will sell for about $35,000 — less than half the starting price of Tesla’s swanky Model S sedan. Though it won’t go into production until late 2017, the Model 3 is a big bet on Tesla’s future that investors are eyeing with anticipation, even glee.
And with those taking long, forlorn looks back, Tesla bolted from its starting line with the breakneck speed of a legend. Founded in 2003, the Palo Alto-based company debuted at $17 per share with its June 2010 initial public offering. Tesla cleared $29 just a year later, and today trades at about $233 per share. That’s almost 14 times the IPO price — and to put that in perspective, just a $10,000 investment would now be enough to buy two tricked-out Model S vehicles, with enough pocket change to snag a Nissan Versa sedan. (Guess which sedan is sexier.)
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But much like a fast car running on the red line, Tesla has spilled some red ink that might require the financial equivalent of a master mechanic. For starters, that soaring stock price has come back to earth since September 2014. Back then it hit $270, just off its all-time high. And since? It’s down almost 17 percent.
Tesla sales continue to climb. The Model S accounted for more than 50,000 units in 2015, making it the best-selling electric car on the market — and one that has spearheaded at least three consecutive years of substantial, explosive sales growth. CEO Elon Musk has boldly projected that total Tesla sales will hit 10 times that mark by 2020.
Yet in a seeming paradox, “Tesla has yet to report a profit in any quarter since it has gone public,” says Jeff Born, professor of finance and director of the executive MBA Program at Northeastern University’s D’Amore-McKim School of Business in Boston. Still, semi-irrational exuberance prevails.
“The lack of tangible results to date has not deterred the stock market,” Born says. “Tesla’s market cap is now just above $30 billion. Compare that to Ford (F) at $51.7 billion and General Motors (GM) at $47.5 billion. Obviously, investors are expecting great things from Tesla in the future.”
But should they? On the consumer sales front, the Model 3 is a slowpoke compared to the Chevrolet Bolt, which will beat it to the finish line by a year or so — and thus win the first-to-market grand prix. With an expected sticker price of $37,000 and a range of 200 miles, the Bolt is not only comparable to the Model 3, but also poses a serious threat.
And if the Model 3 fails to catch on, a troubling scenario could emerge. “Tesla obviously faces major issues as it tries to make a jump from a high-end car manufacturer to a mass-market producer,” says Michael Kramer, a portfolio manager on Covestor and founder of Mott Capital Management in Garden City, New York.
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Which Tesla does Tesla want to be? Regardless of how the new car fares, experts say this sets up a quandary.
If it hopes to play both ends of the market, the now-synonymous link between the Tesla brand and luxury will inevitably get watered down. What’s more, thrift-minded buyers will no doubt gripe about the price of some items that the well to do dismiss with the wave of a bottomless checkbook.
“The biggest hurdle to the success of the Model 3 will be the cost of the battery,” Kramer says. “This is really the most critical part of the whole project. The battery is the most expensive part of the car. As they are able to drive the price of the battery lower, Tesla will be able to improve profit margins.”
In the meantime, Tesla has taken great pains to calm investors by reporting that it’s on track with production targets. And it has no plans to abandon its popular, cut-out-the-middleman sales approach. “They are recreating the way one purchases a car, taking the dealer out of the equation,” Kramer says.
That doesn’t mean Tesla might be beyond car salesman shenanigans. Some market observers contend the company runs on management misrepresentations, excessive hype and unrealistic sales projections.
The way ahead for TSLA stock. At the very least, Tesla looks set to engage in some usual behavior for a would-be major carmaker: that is, using as much as $400 million in anticipated advance Model 3 orders in part to offset operating losses expected to surface when it issues its first-quarter earnings report for 2016 on or about May 5.
A skeptic — and there are many — would whisper that it’s no automotive accident Tesla unveiled the Model 3 a full month ahead of the earnings report. In the last quarter of 2015, Tesla reported an adjusted loss-per-share of 87 cents — posting its 11th consecutive quarterly decline.
And if Tesla misses its Model 3 release target by just a few months or more, you could see even the most loyal Tesla buyers (a good number of whom also own company stock) nervously drumming their fingers on the dashboard.
Ahead of any outcome, opinion among analysts shows a rare, wild split devoid of consensus. Countering the four who call Tesla a “strong buy,” four also peg it as an “underperform” or a “sell” — and another four a “hold.”
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To borrow from the parlance of the fast-car world: Gentlemen, start, stall or service your engines.
“Tesla won’t be able to achieve high levels of sales without convincing customers that they have the ability to support their needs at recharging stations,” Born says. “They won’t be able to provide that infrastructure unless they get new financing or drain their cash balances. And they probably won’t entice investors to back new securities unless they convince them that they’ll achieve sales success.”
All this boils down to a speed test unlike any other.
“It’s not a stretch,” Born says, “to say that Tesla investors have a lot riding on the Model 3.”
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The Model 3 May Be Tesla Motors’ Biggest Test Yet (TSLA) originally appeared on usnews.com
