The Big Question Over Tesla Stock
Even though gallons of (virtual) ink have been spent on Tesla Motors Inc (NASDAQ:TSLA), investors are still split on whether or not TSLA stock can justify its lofty valuation. Heck, I’m not exactly sure where I end up on the issue.
There are strong arguments on both sides, but they can get a little tangled if you’re not paying close attention. Luckily, I get paid to follow these companies, so I can break down both the bullish and the bearish cases for you.
Believe me, I’ve seen some heated debates over Tesla’s share price. The bulls point out that TSLA stock has risen 1,027.6% since its initial public offering (IPO) in 2010. They herald it as proof of Tesla’s superior engineering. Oh, and Elon Musk is amazing!
On the other hand, the bears point out that Tesla seems allergic to deadlines. The company is perpetually falling short of its guidance in ways that could seriously injure the stock price.
For instance, the company wants to build 500,000 cars in 2018. Tesla publicly stated that goal, which naturally caused a surge in the stock price. But can the company deliver? It just struggled to make 14,820 cars in the second quarter when it had promised between 15,000 and 17,000. (Source: “Tesla is about to repeat history — and that’s not a good thing,” Business Insider, July 4, 2016.)
It’s not the first time, either, that Tesla hasn’t met its goals. Early in 2015, the company was estimating 55,000 cars for the year. That forecast dwindled with time until it barely produced 52,000. Is it really possible for the company to increase output tenfold in just two years? It doesn’t seem likely.
From my vantage point, those squabbles only serve to obscure the real fight. I’ve seen these arguments play out 1,000 different ways, but they always come back to one fundamental disagreement: is Tesla just a car company or not?
The bulls and bears simply cannot seem to find a common answer on this one. It may seem trivial, but I really think this is the chasm that separates Tesla bulls from Tesla bears.
If it is a car company, then TSLA stock is overvalued. After all, carmakers operate with notoriously slender margins, so they need scale to achieve profits. That’s easily done for automakers like GM and Ford, but Tesla is still in its infancy. The company is a minnow swimming among whales.
For Tesla bears, this impression colors every decision the company makes. Take, for instance, its offer to buy SolarCity Corp (NASDAQ:SCTY). In case you missed this gigantic piece of news, Tesla has offered to buy out a major provider of rooftop solar panels.
Elon Musk, who happens to be Tesla’s chief executive officer, is also the chairman of SolarCity. Not only does Musk sit on both boards of directors, but he is also the biggest stockholder at both companies. No wonder he declared a conflict of interest.
Nonetheless, Tesla bears think this is the worst deal of all time. They can’t reconcile why a car company would buy a loss-making solar energy provider. From their perspective, Elon Musk is just using one hand to wash the other.
It’s a persuasive argument, but what if Tesla isn’t just a car company? The company has almost completed construction on the world’s biggest battery production plant, not to mention the fact that Elon Musk is constantly talking about disrupting the fossil fuel industry.
Those aren’t exactly the usual goals of a car company. I think it’s at least possible that Tesla was designed with a larger scope in mind, hence the offer to buy SolarCity. The deal would make Tesla capable of offering customers a complete energy package.
Solar panels to gather energy right there on your house, Tesla’s “Powerwall” batteries to store the energy, and an electric Tesla vehicle to get around in. You could live the rest of your entire life without worrying about gasoline prices. (Source: “The real reason Elon Musk is bringing Tesla and Solar City together,” Quartz, July 4, 2016.)
If you look at TSLA stock through that lens, its valuation doesn’t look as ridiculous. SolarCity spends a ton of money trying to lure in customers, whereas Tesla can just add solar booths to its existing dealerships. The sales and marketing synergies are real.
Production costs could also come down if the acquisition goes through.
What I’m saying is that it comes down to that one fundamental distinction: is Tesla just a car company? If you think the answer is yes, then TSLA stock is probably the last investment in the world for you. But if you think the answer is no…
Well, let’s just say that Tesla could still have a ton of room to the upside. Elon Musk thinks the firm could reach a $1.0-trillion valuation if SolarCity agrees to the buyout.