Investors have drastically different opinions toward Tesla Motors Inc (NASDAQ:TSLA) stock. To some, the company represents the Holy Grail. To others, Tesla stock is simply another overhyped asset. The reality is that both sides have their reasons and so far, Tesla stock bulls seem to be winning the argument.
The big question, of course, is whether the rally in TSLA stock will continue. So let’s take a look.
TSLA Stock: Leader in Driverless Car Race
First of all, despite all the criticism toward Tesla’s “Autopilot” function, the company is still well ahead of its competitors in the driverless car race. The reason is that autonomous driving is not a function that appears all of a sudden and starts working perfectly. With different types of roads, varied weather conditions, and varying road signs in different regions, autonomous driving is more like a continuous learning process. For Tesla, the advantage is obvious: tens of thousands of beta testers.
You see, companies in the driverless car business have been developing and testing their autonomous driving systems. For instance, on the webpage of Alphabet Inc’s (NASDAQ:GOOG) self-driving car project, the company notes, “We’ve self-driven more than 1.5 million miles and are currently out on the streets of Mountain View, CA, Austin, TX, Kirkland, WA and Metro Phoenix, AZ.” (Source: “Google Self-Driving Car Project,” Google.com, last accessed July 25, 2016.)
Tesla, on the other hand, has been racking up a lot more miles. By the end of June, Tesla cars have driven more than 130 million miles with Autopilot activated. There was one known fatality, but this compares to one fatality every 94 million miles among all vehicles in the U.S. (Source: “A Tragic Loss,” Tesla Official Blog, June 30, 2016.)
Normally, when you purchase something as substantial as a car, you want one that’s proven to be reliable. However, due to the appeal of both the brand name and the products themselves, Tesla’s customers are more than happy to be beta testers.
Last year, the Tesla “Model S” outsold the Mercedes-Benz “S-Class” in the U.S. (Source: “Tesla Fourth Quarter & Full Year 2015 Update,” Tesla Motors Inc, February 10, 2016.) This year, when the company announced its mass-market “Model 3,” it received almost 400,000 preorders in less than a month. (Source: “Tesla’s Model 3 Reservations Rise to Almost 400,000,” Fortune, April 15, 2016.)
As Tesla puts it, “As more real-world miles accumulate and the software logic accounts for increasingly rare events, the probability of injury will keep decreasing.” (Source: “A Tragic Loss,” Tesla Official Blog, June 30, 2016.)
That’s a good thing to know for Tesla customers and TSLA stock investors.
Tesla Stock: High Valuations
Tesla fans probably won’t like this part, but there is no other way to put it: Tesla stock is expensive. Trading at approximately $230.00 a share, Tesla commands a market cap of $33.85 billion. In comparison, General Motors Company (NYSE:GM) has a market cap of $49.72 billion. But when it comes to their actual operations, the companies are not really on the same scale. Tesla delivered just over 50,000 cars in 2015, while General Motors sold 9.8 million vehicles. (Source: “GM Reports Third Consecutive Year of Record Global Sales,” General Motors Company, January 21, 2016.)
Of course, the reason why Tesla stock became one of the hottest commodities in the stock market is the company’s potential. Investors are not looking at how many cars Tesla sold in the past. Instead, they are focusing on the 500,000-unit build plan the company set out to achieve by 2018.
However, note that building such production capacity is quite a capital-intensive task. In May, Tesla issued an additional $2.0 billion of shares to help finance the production ramp-up. This means dilution for Tesla stock investors.
Of course, it doesn’t help the company’s case when it also announced its plan to acquire SolarCity Corp (NASDAQ:SCTY), a company that’s been burning through a lot of cash lately. (Source: “Tesla Makes Offer to Acquire SolarCity,” Tesla Official Blog, June 21, 2016.)
Tesla Stock Earnings Coming Soon
The company is scheduled to report second-quarter earnings on Wednesday, August 3 after the closing bell. I’m not going to go over what Wall Street is expecting because quite frankly, it’s not second-quarter financial results that TSLA stock investors will be paying attention to. Rather, just like in previous quarterly reports, the key point to listen for is the company’s progress in building up its production capacity.
Earlier this month, Tesla announced that it produced 18,345 vehicles in the second quarter, up 20% sequentially. The company expects to deliver approximately 50,000 vehicles in the second half of this year, equal to all of 2015. (Source: “Tesla Q2 2016 Vehicle Production and Deliveries,” Tesla Motors Inc, July 3, 2016.)
Those are impressive numbers. If Elon Musk can shed some light on how the company can grow from today’s numbers to 500,000 vehicles annually by 2018, TSLA stock could keep its uptrend going.