Tesla has been a crazed stock on the market for the last 2 years on it's amazing run it's been having. Tesla motors has been labeled the future of the automotive industry and could have the potential to be bigger than GM and Ford combined. While the stock has enjoyed better success than GM or Ford, it still has a heap of opposition against it. For one thing that investors have is the evaluation of Tesla. Tesla has been growing not only on earnings but mostly, on pure hype. Tesla has drawn many oohs and ahhs, but it's high prices on it's models and costs could scare investors away. Here's my take on Tesla:
The Potential
Tesla's concept is revolutionary. Musk's genius way to power a car finally made electric cars a legitimate success. Plus to even start a car company at this day and age is a feat. Now the concept moves away from a gas engine and instead uses the actual frame of the car as the battery. Install it with other high tech features, take away gears, the shifts and constant buffer time most cars have from shifting to gear 2, 3, or 4, and you have the concept of Tesla's car. To move away from the combustion engine and go towards a complete battery, and to start a car company with success (the first to do so in the last 50 years) is breathtaking and deserves the recognition its been having. The potential for Tesla is enormous.
The Downside
As genius of an idea this is, there is actually a lot of downsides toward Tesla that many would not expect. In fact, an argument could be made that there is more of a downside to Tesla than an upside. Here I'll take a look at a few downsides of the company:
1. Fans of Tesla don't really do anything for the company from an investors stand point
Tesla has an enormous following coming from investors and consumers. The investors have contributed to the success that Tesla's stock has enjoyed the past two years. The consumers might be in curiosity and bring Tesla up in conversation because of how revolutionary and just flat out cool the car is. But the average consumer doesn't do much for the company. Obviously word of mouth is crucial to get the word out for a company, but Tesla does not need that anymore, they need people to buy there car. Sadly the pricing for a Tesla has been pricy and is grouped in the luxury car category. A model S can go for over a $1,000 a month. Until Tesla produces a cheaper car, many consumers won't be able to get their hands on it. Therefore the target consumer would stay the wealthy individuals.
2. Its Giga factory
It has been in talks with Panasonic, one of Japan's largest electronic producers, to build an estimated $5 billion factory in Nevada. This factory would produce lithium-ion batteries for its cars and in hope would lower the cost of making the batteries and lower the key cost of the car. Thus, making the car more affordable for the consumer. Now there is plenty of upside to this giga factory it is set to build, but this is also a downside for Tesla. $5 billion dollar project is a hefty price for one factory, and the risk reward could be costly. Plus, although Tesla's are more environmentally friendly than any other car on the road (look on Tesla's site for the comparison of energy costs compared to fuel costs of an average car) lithium-ion batteries have raised slight concern for how energy efficient they actually are to produce. The metals that the batteries require are said to be incredibly harmful for the atmosphere. Plus the change of owning an electric car to an average car is a huge. Many consumers could even be skeptical about the change.
3. Some States Don't Like It
Perhaps one of the biggest hurtles for Tesla to overcome is its negative impact on lobbyists. Some states have banned the sales of Tesla (Texas, Virginia, Maryland, and now New Jersey). This is because Tesla doesn't use a car dealership to sell its cars. Instead Tesla sells through itself, and the auto industry lobbyists aren't too happy.
4. The Hype
From the investors stand point buying Tesla is an investment for the future. Well, that price that Tesla is trading at is already counting the future in it. The hype seems to be what is driving Tesla stocks higher instead of its actual earnings. People believe that the earnings will rise in the stock in the future, therefore they go and buy it now. Well those future earnings are already built into the stock price, that is how Tesla has been such a successful stock. The real value of the company still needs to be proven by its earnings, and its cut down on costs to produce the car.
Conclusion
Do not get me wrong, Tesla is an amazing company and in fact has tremendous upside. For instance, Elon Musk is one of the best entrepreneurs of my time. With him at the helm Tesla and the rest of Elon Musk's adventurous projects could be huge successes. I am only giving concerns of why Tesla could be an over-speculated company. Maybe not now, but down the road earnings and the growth its been promising has to live up to its expectations. These expectations have been set incredibly high, and Elon Musk definitely knows what he's doing. October 9th Tesla is set to make announcements regarding an updated product line and more. Like the Apple events, this may be eye candy for consumers, enthusiasts, and investors alike. But, understand when investing in it, measurements for actual sustained growth is needed. And other car companies are following in Tesla's footsteps for electronic cars. Invest with Care.
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