Tesla Motors, Inc. Stock This Week -- Too Much Risk?

Tesla still trades 20% below its all-time high as investors reevaluate the electric-car maker's risk profile.

Apr 5, 2014 at 3:00PM

Tesla (NASDAQ:TSLA) stock traded flat this week, slightly trailing the S&P 500's small gain of 0.4%. Notably, however, the stock still trades 20% lower than its all-time high of 265 reached earlier this year on optimism surrounding Tesla's announcement that it will be building a Gigafactory, or a lithium-ion factory with the capacity to out-produce the entire world's total lithium-ion production today. Today's lower price reflects both market and business specific worries as investors reassess the risk profile in growth stocks and Tesla's planned Gigafactory.

Model S Red Twitter

Model S. Image source: Tesla Motors official Twitter feed.

Are growth stocks overvalued?
The market's hottest growth stocks have pulled back in the past few weeks. With the S&P 500 rising about 19% in the past 12 months and many growth stocks soaring even higher during that timeframe, investors seem to be re-evaluating the expectations baked into the Street's trendiest names.

Tesla, for instance, trades at 12.6 times sales -- that compares with a price-to-sales ratio of about 0.5 for General Motors and Ford and 1.7 for the S&P 500. With a lofty valuation like this, saying the market has enthusiastic expectations for Elon Musk's U.S.-based electric car-maker may be an understatement.

Can Tesla live up to these expectations? It plans on executing on two major growth drivers that should serve as catalysts for underlying business growth in the coming years: the Gigafactory and a more affordable electric car. Expecting to produce and sell 500,000 cars per year by 2020 (from just 22,500 last year), it could be argued that Tesla's future potential is equally as exuberant as the stock's current valuation.


Gigafactory rendering. Image source: Tesla Motors.

Just how risky is the Gigafactory?
An April 2 report from The Wall Street Journal profiled Tesla's plans to build the Gigafactory as a fairly risky endeavor -- a stance that would be tough to argue against. After all, not only is lithium-ion production at the scale Tesla wants to reach unprecedented, but deliveries of 500,000 fully electric cars per year is difficult to comprehend.

The Journal's Mike Ramsey provided perspective.

Tesla, with sales of just over 22,400 cars last year, is already the largest buyer of lithium-ion battery cells in the world. With plans to sell 500,000 vehicles, its own demand would be greater than the demand for every laptop, mobile phone and tablet sold in the world.

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Model S.

Even Panasonic, which Tesla is attempting to partner with in the Gigafactory, asserts that the risk meaningful. "There's no doubt that [the new plant] will entail a far bigger risk than the current investment we're making. I cannot disclose our investment stance at this point," Panasonic CEO Kazuhiro Tsuga said last month, according the WSJ. Needing $4 to $5 billion to get the factory to its 2020 capacity for 500,000 vehicles per year, Panasonic's investment is important to Tesla.

Despite market concern for valuation and risks with the Gigafactory, Tesla's Model S and the company's execution thus far should give investors confidence it can continue to meet or exceed expectations. The Model S, for instance, proved its value proposition is compelling for consumers even among elite luxury sedans, finishing 2013 as the top-selling car among comparably priced vehicles -- despite being supply limited. Of course, all this excitement seems to mostly be baked into the stock price, so investors should proceed with caution.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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