This article was updated on March 13, 2017, and was originally published on Oct. 13, 2016.
Founded in 2003, electric-car maker Tesla (TSLA -1.92%) has exploded onto the scene. But if Tesla CEO Elon Musk gets his way, the company is only just getting started. The CEO believes Tesla's annualized vehicle production rate is about to soar from 100,000 units today to 500,000 units in 2018 thanks to the company's upcoming lower-priced Model 3. And this doesn't even take into account Tesla's nascent energy storage business, which management hopes will help accelerate the world's transition to sustainable energy.
Is this growth stock a buy? Or does a pricey valuation and rising competition make it a hold -- or even a sell?
Image source: The Motley Fool/author.
When the Fool asked its 636,000 followers on Twitter about Tesla's investment prospects, the majority was clear: It's time to buy Tesla stock.
For a 5-10+ year investment. . . Tesla. . . buy, sell, or hold?
— The Motley Fool (@themotleyfool) September 14, 2016
Polled in September, when the stock was trading at about $196, 48% of the 3,206 survey respondents thought Tesla stock was a buy, 29% thought it was a hold, and 23% believed it was time to sell.
As investors ponder whether or not they should add Tesla stock to their portfolio, here's a look at both the bear and bull case for the stock.
Bear case
There are three common bearish narratives for Tesla stock: a pricey valuation, rising competition, and uncertainty surrounding Tesla's ability to execute on its big vision for the future. All of these arguments against buying Tesla stock are important risks to consider, so here's a look at each.
Valuation risk: Tesla's frothy valuation becomes immediately clear from the company's enormous market capitalization of nearly $40 billion -- notably about $10 billion higher than when the Fool polled its followers about Tesla stock. This figure, of course, is more than half of General Motors' $55 billion market cap, even though Tesla sold less than 80,000 vehicles in 2016 and General Motors is selling about 10 million vehicles annually. Investors obviously have huge expectations for Tesla's growth.
With the stock essentially priced for Tesla to become a mass-market player, a pricey valuation today could prove to be a reason for modest or even negative returns in the future if growth doesn't pan out as optimistically as management hopes.
Competition risk: Starting with General Motors' all-electric Chevy Bolt, which began shipping to dealers in late 2016, Tesla is about to go head-to-head with many new electric vehicle automakers. In recent years, essentially every major automaker has announced big plans for electric vehicles.
Some investors worry that new entrants to the EV space with 200 or more miles of range -- particularly General Motors' Bolt, since it starts at about half the price of Model S and comes about a year ahead of Tesla's lower-cost Model 3 -- could wear on Tesla's head start.
Execution risk: Then there are concerns about Tesla's ability to execute on its growth plans. Even if demand for Tesla vehicles and energy storage turns out to be as optimistic as management anticipates, execution missteps could mean the company fails to take advantage of market opportunities.
It goes without saying that the auto business is one of the most capital-intensive industries; if Tesla fails to generate enough capital for the required up-front investments needed for growth, or fails to ramp up manufacturing as quickly as it hopes, Tesla may end up getting taught a lesson by well-capitalized and experienced incumbents.
Bull case
Still, Tesla does have some things going for it -- namely momentum, a first-mover's advantage, and rapidly increasing demand for its vehicles.
Even bears are unlikely to discount the prodigiousness of Tesla's accomplishments during the last five years. Revenue has soared at a compound average annualized growth rate of 103% during the past five years, propelled mainly by the company's Model S sedan, which has been lauded by numerous car magazines and rating agencies as one of the best vehicles ever made. Sales of the vehicle have subsequently soared, ranking its deliveries at the top in the U.S. and Europe among comparably priced sedans. Now, its late-2015 launched Model X deliveries are climbing quickly, looking poised to soon rival Model S.
Model X production at Tesla's factory in Fremont, California. Image source: The Motley Fool/author.
As long as Tesla can continue to grow at a blistering pace (and the company's recent ability to increase deliveries at accelerating growth rates provides promising evidence that size won't slow down expansion), the company looks poised to continue distancing itself from competition's early efforts in the long-range electric vehicle space.
Furthermore, Tesla's $35,000 Model 3, which is slated to begin delivering to customers in the second half of 2017, has previewed immense market opportunity ahead. Within about a month and a half of the Model 3's unveiling in March 2016, Tesla had garnered about 373,000 deposit-backed reservations for the vehicle.
If early interest in Model 3 is indicative of the market opportunity in this nascent space as Tesla brings more affordable models to market, Tesla shareholders may be positioned to benefit from a major industry transition.
Ultimately, a close look at a few bear and bull arguments for Tesla stock reveals promising opportunity, but also a high level of risk. While the majority of Fool Twitter followers who responded to the poll think Tesla stock is a buy, investors should tread carefully, keeping in mind the risks of investing in a company that's betting so heavily on a new technology in a capital-intensive industry. Furthermore, investors should keep in mind that the stock is up about 26% since the poll: Tesla stock is trading closer to $250 today.
