Upon publication of a critical article, shares of electric carmaker Tesla (TSLA +0.53%) slipped four points, showing that investors and analysts have yet to feel assured that the company is here to stay. While it's true that the company faces headwinds, both internal and external, no one should be discounting the amazing feats that CEO Elon Musk and the Tesla team have accomplished in a very short period of time. As is often the case, the question here may not be if Tesla will live up to the hype or not, but instead, whether today's stock price reflects a reality, or market hysteria.
The article
Barron's is one of my favorite financial publications. The writers avoid sensational material in favor of realistic, grounded analysis, and actionable advice. This past week, the company released its latest edition with a cover story reading, "Recharge Now!" The story has two approaches -- one to the vehicles, and one to the stock.
The Model S, Tesla's $90,000 sedan, is widely considered to be the most innovative automobile to enter the market in a long, long time. Barron's both acknowledges and supports this notion.
The vehicle may top 15,000 in sales this year, according to management -- an impressive accomplishment given the short period of time Tesla has been in existence, and the high cost of entry to get in the driver seat. Analysts, and the company itself, believe global sales could top 30,000 units by 2014.
To me, there's no question that Tesla can out-innovate any of the major auto manufactures -- whether in the U.S. or abroad. Willy Wonka-esque CEO Elon Musk is a true miracle worker of our time -- with successes ranging from spaceships to solar panels. His vision cannot, and should not, be disregarded.
The problem
Tesla's stock is a great example of betting the jockey, not the horse. Going up against the big auto companies is something that has been attempted many times, but very rarely achieved with any success -- and Musk seems to be a part of that minuscule population. The issue, though, lies in its market value and the progression of technology.
As written in the Barron's piece, Tesla's $100-plus stock price doesn't reflect a company with 15,000, 30,000, or even 60,000 units sold annually. It reflects a car company selling well into the six figures (and not on the sticker). To even approach this, Tesla needs a car under 50 grand. Given the enormous cost of the batteries (far above $10,000), this is a huge problem. Musk claims the Gen III Tesla will be priced at this level, but the technology will need to improve, and bring costs down, at an unprecedented rate to make it feasible.
Investors paying 100 times earnings for this company are assuming this will be done, no problem, and that the company can then move on to scaling the operation quickly and effectively.
An investment thesis that relies on a single event taking place in 2017 -- expected release of the Gen III -- is speculative. If that's within your comfort level, by all means buy. But for most, I recommend heeding Mark Twain's words: "There are two times in a man's life when he should not speculate: when he can't afford it, and when he can."
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