TSLA Stock Set to Rise Further, But with Rising Risks
Tesla Inc (NASDAQ:TSLA) continues to generate the usual buzz in the market as the date for the “Tesla Model 3” inches closer. Tesla stock is already up 23% in the year to date and looks set to continue on its upward trajectory, albeit not without its usual speed bumps.
On Friday, Elon Musk tweeted a Model 3 video and added few words of wisdom as well.
First drive of a release candidate version of Model 3 pic.twitter.com/zcs6j1YRa4
— Elon Musk (@elonmusk) March 24, 2017
“Am noticing that many people think Model 3 is the ‘next version’ of a Tesla, like iPhone 2 vs 3. This is not true.” Musk posted.
He clarified that the Model 3 would be just a smaller and more affordable version of the “Model S,” with lesser range and power and fewer features. The Model 3 will also have a single screen display instead of two, and it would combine instrument cluster as well infotainment. It cannot be compared to the Model S, which has more advanced technology.
It is well-known that the high expectations surrounding the Model 3 have been driving the TSLA stock price higher since the beginning of this year. Tesla has already been giving indications that the production of the Tesla Model 3 is on schedule. This is a big relief for investors.
Tesla stock closed at $263.16 Friday, ending the session with a gain of more than three percent. In the year to date, the stock has performed better than the broader S&P 500 Index, which went up by about five percent in the same period.
Chart courtesy of StockCharts.com
In the middle of the month, Tesla had also unveiled the details of its offer to raise capital. Elon Musk had previously indicated that a capital raise would be good to protect against potential risks. The offering amounted to $1.15 billion, including $250.0 million in common stock and $750.0 million in convertible notes.
Investors had cheered the capital raise, sending Tesla stock higher up. Tesla Inc already had a good cash position. The amount raised would help the company strengthen its balance sheet further and reduce any risk that might come up with the ramp up of Model 3 production.
And this is where some investors are concerned about the risks that could arise in future. It is likely that the company may have to raise further capital as the Tesla Model 3 production ramps up and further investments are made in the infrastructure. Tesla Inc does not have the luxury of going wrong on the Model 3 execution, and capital insufficiency may dent investor confidence and hit Tesla stock hard. The company has high level of cash burn already, which is not expected to come down any time soon.
Impact of SolarCity on TSLA Stock
On Friday, Elon Musk also tweeted that Tesla will begin taking orders for solar roof tiles in April, replying to a question.
Yes, we almost forgot that now the Model 3 company is also into selling roof tiles!
And that is where things begin to get a little bit shaky. A section of investors have always opposed Tesla’s acquisition of SolarCity Corp (NASDAQ:SCTY) as it would lead to a weaker financial position. Elon Musk had tried to allay these fears, explaining how SolarCity will strengthen Tesla’s cash balance. (Source: “Tesla and SolarCity,” Tesla Inc, November 1, 2016.)
The electric car maker turned energy company had launched the solar-powered roof shingles last October. Musk had stated that the new roof tiles will cost less than a traditional roof. But again, this is a new market that will be tested by the company and it will come with its own set of risks. In case the product does not live up to the hype or the demand is tepid, Tesla stock could come crashing down.
However, as always, Elon Musk appears to be quite confident about Tesla products, as was evident when he made a bet early this month, that Tesla can get a battery system installed and working within 100 days to help get rid of the blackouts in South Australia. And if Tesla does not do it in the given time frame, the company will not charge anything.
The energy storage market is another area with a lot of potential growth for Tesla’s energy storage products like “Powerwall” and “Powerpack.”
The Bottom Line on Tesla Stock
The biggest challenge for Tesla Inc right now is to deliver 400,000 Model 3 cars on time and without any quality issues. Tesla stock shall get a big boost from the success of the Model 3, which would bode well for the “Model Y,” the compact SUV based on the same platform as the Model 3.
But let’s not forget, Tesla is a volatile stock. It grows more with the cult of Elon Musk rather than fundamentals. That makes it more exciting to watch as compared to the other more predictable ones. But that definitely makes it a more risky bet as well.
From the low price target of $185.00 given by Goldman Sachs Group Inc (NYSE:GS) to the highest target of $305.00 arrived at by Morgan Stanley (NYSE:MS), the range of Tesla stock price targets is really wide. But if you believe in the potential of the Model 3 and the energy storage market, then making a decision to invest in TSLA stock would not be a hard one for you.