Tesla Motors Co. (ticker: TSLA) is easily one of the most enthralling companies on Wall Street. Sprung from the brain of a once-in-a-generation genius, Tesla is almost singlehandedly taking electric cars mainstream with the looming late 2017 release of the Tesla Model 3.
Never lacking on ambition, the company hopes to cripple our reliance on fossil fuels, eradicate the need for human drivers, change the way we get our energy and make cars safer than ever before.
None of that would mean much if people didn’t think it was at least theoretically possible.
If the gyrations of the stock market are any indication, many investors seem to agree. The 2010 Tesla initial public offering took the automaker public at a price of $17 per share; now shares are around $220.
Despite that miraculous run-up, Tesla shares could still turn out to be a steal. In 2015, it began making large batteries, dubbed Tesla Powerwalls, meant to store energy. Considering Tesla recently made a bid for SolarCity (SCTY), a leading retailer of solar panels and the energy they produce, Tesla could be deemed a utilities stock in a few years’ time.
As far as the whole car business thing, growth prospects are pretty juicy in that industry, too. While Tesla aims to deliver between 80,000 and 90,000 vehicles in 2016, CEO Elon Musk said it should be able to produce 500,000 vehicles in 2018.
[See: 10 Ways to Invest in Driverless Cars.]
As if that weren’t enough, Tesla is also widely considered a technology pioneer, and in the race to develop fully autonomous vehicles, Tesla’s focus on software and machine learning have put it firmly in the driver’s seat, so to speak.
That gives Tesla, an exciting mishmash of futuristic opportunities, potential few other companies on the planet can relate to — and potential that Wall Street is enamored with. Billionaire investor Ron Baron, for one, has said he thinks TSLA stock could multiply in value by 20 times over the next 10 to 20 years.
The excitement around Tesla, its brand, and its enigmatic, Tony Stark-like leader create more than just intangibles and billionaires talking their book, says Scott Galloway, founder and chairman at L2 Inc., a leading intelligence firm that benchmarks overall brand performance.
“You could argue that Tesla has access to the cheapest capital in the history of the automobile industry … it makes sense from a capital allocation standpoint” to take on expensive endeavors like the gigafactory. Galloway points to Tesla’s price-sales ratio, which is 7.8, and notes that General Motors Co.’s (GM) P/S is a mere 0.3, making secondary offerings a less attractive way to raise money.
With that said, there’s no such thing as a perfect stock, and Tesla’s ability to fundraise has a major downside — one of many that could make buying Tesla shares an absolute disaster for investors.
Raising money by issuing more stock dilutes existing shareholders as each existing unit of stock represents a smaller ownership stake in the business. Just such a dilution occurred in May, when Tesla raised $1.7 billion in a secondary offering to fund its expansion.
Unfortunately, dilution wasn’t the only negative that came from the issuance: The SEC is investigating the auto manufacturer to see if it violated securities laws by failing to disclose before the offering a fatal wreck that occurred when a Tesla driver was using its autopilot mode.
Other issues also swirl around Tesla and cast serious doubt over whether it can match the wider market in the long term. Most conspicuously, Tesla is emphatically not profitable and generates negative cash flow. Its execution is notoriously unreliable — the Model X release was delayed for a full two years, for example. What if Elon Musk is hit by a bus?
For that matter, what if a car using autopilot runs into a bus? Two recent wrecks, one fatal, involved drivers using autopilot technology, and Tesla now needs to convince consumers that its technology is safe.
And while electric vehicles and autonomous cars are coming whether we like it or not, the commercial winners in those industries are not a foregone conclusion.
[Read: GM Stock: How General Motors Will Respond to the Tesla Model 3.]
“It’s very difficult to predict who the eventual winners will be in a new technology space,” says Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania. “For example, look at how pervasive web search engines are in today’s market, yet there were many big failures in that space.”
So while a laundry list of risks and concerns pop up when thinking about buying and holding Tesla stock for the long run, perhaps the biggest risk of all hasn’t even been explored yet: the SolarCity deal.
Barry Randall, portfolio manager of the Crabtree Technology portfolio for Covestor, a Boston-based registered investment advisor, says the proposed acquisition is a financial nightmare.
“SolarCity, like Tesla itself, is both deeply indebted and operating cash flow-negative. While Tesla does sell battery packs to SolarCity customers, the thing that Tesla and SolarCity most have in common is the roughly $3 billion in debt on each of their balance sheets,” Randall says. SolarCity and Tesla both have $2.8 billion in long-term debt on their books, but Tesla logged revenue of $4.1 billion last year, while SolarCity grossed just $400 million.
“SolarCity has massively negative cashflow,” says Alexander Gladstone, author of a recent story on SolarCity on Debtwire, a financial news and intelligence service. “There’s been an increase in competition, and there have been a few adverse regulatory moves.”
Most notably, he says, is Nevada, which reduced the incentives for SolarCity customers to use their solar panels, essentially rendering their operations in the state worthless. About 550 workers lost their jobs, Gladstone says.
“It’s essentially a business that has to keep raising more money because its operations are not bringing in positive free cash flow,” he says.
In fact, these are risks that the market acknowledged the day after the SolarCity offer was made, with Tesla shares plunging 10.5 percent that day. The reduction in Tesla’s market cap, Gladstone notes, was greater than the value of the offer itself.
[Read: 7 Stocks That Should Grow With Millennials.]
On the other hand, second-guessing Elon Musk has rarely been a lucrative way to make money in the past. Just know that by betting on him and Tesla, you’re also taking a healthy dose of risk.
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Should You Invest in Tesla (TSLA) Stock? originally appeared on usnews.com
