This article was updated on April 5, 2017, and originally published July 18, 2016.
Tesla Motors (NASDAQ: TSLA) shares opened at about $287 this week after reporting earnings. Despite selling off a bit after absorbing the money-losing SolarCity into its business, the stock has grown to 17 times its IPO price in the seven years since it came public -- an incredible achievement. Perhaps even more incredible, there are still a lot of people who want to buy Tesla stock today.
These investors are unfazed and unworried that they might be buying too late, or after it's already gone up, or at a non-existent P/E ratio. And that's OK.
What's past, as they say, is prologue. And the fact that Tesla stock has gone up so much already won't necessarily prevent it from going up even more in the future. Need proof?
Well, you probably thought Tesla cost too much when it first became a five-bagger, shooting past $85 in May 2013, right? And did you think it was definitely too expensive after it doubled again just a few months later?
And yet, Tesla stock continued moving higher from those levels. So just because Tesla stock has gone up a lot already doesn't necessarily mean it's a terrible idea to buy the stock today. But here are three reasons you might want to buy Tesla stock that are pretty terrible.
The government loves electric cars
Yes, the Obama administration loves electric cars. But what about President Trump?
Under President Obama, well-heeled buyers of Tesla's Model S and Model X vehicles have been entitled to income tax breaks of as much as $7,500 a car. But will President Donald Trump continue to favor electric cars over internal combustion engine alternatives at a cost of hundreds of millions of dollars in taxpayer subsidies?
For that matter, even if President Trump does decide that electric cars are the right technology to support, what might he do if a few years from now, Volkswagen or Nissan invent an electric car that captures consumers' imaginations, and Americans start buying more imported electric cars than they do domestically produced Teslas? That would take away a lot of the motivation for politicians favoring the electric-car industry.
And you can bet your bottom dollar that lobbyists from rivals like Ford (NYSE:F) and General Motors (NYSE:GM), which make more profit from selling gas-guzzling trucks and SUVs than they earn from electrified econoboxes, will be quick to point that out. That would surely act as a brake on Tesla's sales, especially as the $7,500 tax credit looms larger as a percentage of the cost of cheaper Tesla 3 cars soon to arrive.
Speaking of profits, Tesla promises to become profitable... eventually. Analysts believe it will fulfill that promise -- perhaps as soon as 2019, according to estimates provided by S&P Global Market Intelligence.
Investors afraid to miss the boat when that happens may be buying into Tesla today, to ensure they'll have it in their portfolios for the share price bump when profitability arrives. And yet, they may not like what they see when Tesla does turn profitable.
After all, car making is a competitive business. Most established car companies -- the Fords and GMs of the world -- have to subsist on single-digit profit margins from their sales. GM earns only 6% operating profit margins on its sales, for example, while Ford ekes out a living on 3% margins.
Maybe Tesla can do as well, if and when it turns profitable. Maybe it can do a bit better. For the time being, we just don't know because, after 14 years in business, Tesla still hasn't delivered on the profits.
Until they're transformed into action, promises are just words. As an investor, it's your duty to look past the promises and focus on the numbers.
Last but not least, Musk himself is probably the No. 1 reason most investors buy Tesla stock. Sure, the reasoning goes, Ford and GM and other car companies have historically scraped by on single-digit profit margins. And yes, Tesla is a car company, too. But, but... Tesla has Elon! And Elon Musk is magic.
Well... OK. But what do you think will happen if, one grey day, Tesla's board of directors gets mad at Musk and fires him from the company? What if, for example, the SolarCity merger turns out to be a disaster, and craters Tesla's stock price after the merger of two profitless companies -- against all odds -- fails to produce one profitable company?
Sure, Musk owns a large chunk of Tesla shares, but he doesn't own a majority of them. And it's not at all unheard of for CEOs -- even CEOs whose identities seem inextricably entwined with those of their companies -- to get fired after making bad business decisions. It happened at Twitter. It happened at Men's Wearhouse, at Groupon, and at JetBlue.
What you may not know is that it happened at Tesla, too. In 2007, the company fired founder Martin Eberhard (three years before the company IPO'ed), and replaced him with... Elon Musk. That same scenario could repeat at some time in the future, and leave you owning an Elon-less Tesla stock -- which might turn out to be worth a whole lot less than an Elon-ful Tesla stock today.
Will Musk go the way of his predecessor? Probably not. But still, be a good Boy or Girl Scout. Be prepared.
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