Tesla Motors Inc: This Is the No. 1 Reason to Bail on Tesla Stock

Tesla Motors IncTesla Stock Is Too Overpriced

Tesla Motors Inc (NASDAQ:TSLA) wants to revolutionize the automobile with 100% electric cars and advanced technologies. However, its efforts have been undermined by a recent series of snags. Don’t let the frequent bullish runs in Tesla stock charm you. Tesla CEO Elon Musk sings a siren song and many investors risk crashing their portfolios against sharp rocks in the long run.

You see, dear reader and likely Tesla stock contemplator, Tesla stock is simply too expensive. Its valuation is several times above book value—how does 31 times above book value sound?—and that’s in a world where most car companies trade at once or twice their book values.

For those investors who are true believers in Tesla and want to back their almost religious allegiance by including it in their portfolio, there’s more confusion. Some of the true believers might ask, how can you put a price on the Vatican, given the holy status of can-do-no-wrong Tesla?

Time to Bail on Tesla Stock

The problem is that some idea of a relative value exists.

Consider this shower of reality: if Tesla is lucky, the company might sell 55,000 cars this year.

General Motors should sell about 10 million. That means GM, which also has electric cars in its lineup, sells 200 times more cars than Tesla. Yet, Tesla’s market cap continues to hover in a range that is half of GM’s. (Source: “Tesla Market Cap Hits Half of GM’s,” 24/7 Wall Street, June 22, 2015.)

Can you spot the intruder, kids? That intruder has a name: why it’s good ole “Big Daddy Reality Check.”

Tesla stock is flying today. No doubt the successful mission by a SpaceX rocket (a company also owned by Tesla CEO Elon Musk) has contributed to the more than two percent hike. However, as the Tesla chart clearly demonstrates, the company’s up and down days alternate frequently. By all means, you could make some money on Tesla if you buy it during one of its monthly doldrums periods and rest assured that the Tesla cult fanatics will defy logic and gravity, pushing the stock back up to its lofty valuations. The problem is that this cycle could break. Tesla has some serious issues, after all.

Tesla said it made only 18,345 cars in the second quarter, delivering to about 14,370 clients, rather than the 20,000 and 17,000 anticipated. (Source: “Tesla Q2 2016 Vehicle Production and Deliveries,” Tesla Motors Inc, July 3, 2016.)

For the second half, the group intends to deliver 50,000 cars, which should bring the company to 79,000 deliveries in 2016, well below the 80,000–90,000 targeted earlier this year. Once again, Tesla expects a loss in 2016. The smart money is betting against Tesla’s promise of producing 500,000 vehicles per year starting in 2018. That would mean assembling and selling about 12 times the current number but having only a year and a half to ramp up production.

Does it sound farfetched? It should. But it should also make you think twice about getting into Tesla stock, even if you get into a Tesla car. You can still enjoy the electric car experience without having to lose your savings.

I can already hear the disciples, chomping at the bit. “Tesla will be making the Model 3 economy electric,” they thunder. True, Tesla plans to make the “Model 3” its bread-and-butter vehicle. Tesla has certainly put a lot of faith in marketing the Model 3, the entry-level car sold for an estimated $35,000 base price—we shall see about that—to support the 500,000-per-year production figure.

The problem is that Tesla does not appear to have resolved its production problems. These have delayed initial deliveries of the “Model S” sedan and “Model X” SUV. Therefore, forgive my skeptical nature when I say that Tesla is making promises it can’t cash right now. Unfortunately, Tesla fans are also betting too high with their own money. Even if you like Tesla and Tesla stock, think twice. Save your money and waste it on a nice vacation or on a Tesla car—not TSLA stock.

Oh, and if you are not sufficiently convinced by the risks, consider that the “Autopilot” feature could get Tesla into serious trouble. The opening of a U.S. government investigation following the death of a motorist who was apparently so convinced of Tesla’s Autopilot self-driving feature that he was watching a Harry Potter movie instead of driving his Model S car turn very negative for the company. Tesla itself conceded that its software, consisting of sensors and other technology, allowing the car to perform only certain maneuvers like braking in case of danger, had not detected the truck that crossed the road. This accident, which is a blow to the development of the autonomous car, has led some observers to wonder if Tesla had sufficiently tested Autopilot. (Source: “Tesla’s Model X Has Bigger Problems Than Faulty Falcon Doors,” Wires, April 26, 2016.)

Some savvier investors have already noticed the predicament of TSLA stock after Elon Musk decided to put forth an offer to merge Tesla and SolarCity Corp (NASDAQ:SCTY), a producer of solar energy and another brainchild of Elon Musk. This union between the two companies, which between them have lost $1.6 billion in 2015, raises issues of governance and conflict of interest since Musk and his family members occupy key roles at each respective company.

The Bottom Line on Tesla Stock

Tesla clings to its ambition to become the best car producer in the world. In his “Master Plan,” the first part of which was unveiled in August 2006, Elon Musk said that Tesla was going to reinvent the automobile in three stages.

Instead, what Musk has truly achieved is to perform alchemy with Tesla stock. Tesla has not yet revolutionized the automotive industry. Its mainstream competitors can do a better job and offer half the risks.

For the record, BMW, Mercedes-Benz, GM, and Ford are all about to launch electric models. Others will soon follow suit. Even Maserati will have an all-electric sports car in the next few years.

You’ve been warned about Tesla stock. You’re welcome.