Tesla Motors (TSLA 0.07%) has come a long way since 2011, when it was one of the most shorted stocks on the Nasdaq. On top of being one of the best performing stocks last year, Tesla posted its first ever profit and the electric-car maker's Model S sedan was crowned Motor Trend's 2013 Car of the Year. However, the California-based company faces serious challenges in the year ahead.
Let's take a closer look at three major hurdles Tesla will need to overcome in 2014, and how investors should play the stock going forward.
Mounting costs
Tesla is expected to make significant capital investments in 2014 -- particularly as the company builds out its worldwide supercharger network and expands into new markets overseas such as China. Such added costs would hurt Tesla's bottom line. For its upcoming fiscal fourth-quarter, the company could see a 25% spike in research and development costs, as Tesla accelerates development efforts on its Model X crossover vehicle.
On top of this, fourth-quarter selling, general, and administrative expenses are expected to rise 20% as Tesla pours more cash into new retail locations, service centers, and supercharger facilities.
Source: Tesla Motors.
Having said that, these investments are critical to Tesla's ongoing success. In fact, the company's supercharger network is a tremendous value creator for Tesla as it creates a global infrastructure for gas-free driving. Moreover, Tesla is charging ahead with plans to install supercharging stations that cover 80% of the U.S. population and parts of Canada this year. Therefore, investors in this name need to get comfortable with the axiom that it takes money to make money.
Delivery delays
Tesla's long-awaited crossover EV is scheduled to hit the road later this year. However, we could see more delays related to supply constraints. The automaker put the brakes on production of its Model X last year, pushing back the delivery date to late 2014, a year later than Tesla had previously promised.
Tesla first unveiled its Model X in 2012, at which point thousands of drivers coughed up the $5,000 deposit required to reserve the all-wheel-drive vehicle. And who can blame them? Similar to Tesla's Model S, the performance Model X can accelerate from 0 to 60 mph in 4.4 seconds. To put that in perspective, that's faster than the Porsche 911 sports car -- only, unlike a sports car, the Model X can comfortably fit seven large adults, with room to spare.
Tesla Model X. Source: Tesla Motors.
While this should make the Model X a competitive force in the auto industry, Tesla could see order cancellations if it isn't able to hit its updated delivery date slated for the end of this year. After all, supply constraints have held Tesla back in the past. In November, the company said production during its third quarter was curtailed by capacity constraints for the lithium-ion batteries that power its electric cars.
Investors will want to keep an eye on how Tesla addresses these supply issues going forward. Moreover, Tesla's future greatly depends on the company's ability to produce more affordable cars at a faster pace, particularly if the stock is to live up to its lofty valuation. Shares of Tesla currently trade around 98 times next year's earnings.
Bloodthirsty rivals
Competition from deep-pocketed rivals is another risk factor to consider. Big autos including Ford and General Motors (GM 0.72%) are investing both time and resources toward stealing market share from Tesla in the niche EV space. General Motors even enlisted a special team of GM employees to study Tesla's disruptive battery technology last year. GM now says it's developing a mass-market electric-car capable of traveling 200 miles on a single charge, in an apparent attempt to challenge Tesla's lead in the long-range battery battle.
Tesla certainly has the upper hand when it comes to EV battery technology these days. However, compared with Tesla, GM and Ford have significantly more cash on hand to invest in R&D. As a result, Tesla needs to keep innovating if it's going to stay ahead of competitors in an industry where economies of scale favor traditional automakers.
What it all means
Tesla has an extraordinary track record when it comes to beating the odds. However, it's still early in the game for this company, and there will certainly be more obstacles to overcome down the road. Nevertheless, management's reputation for near-flawless execution makes Tesla a worthy investment for patient long-term investors today.
