Blue chip stocks are more than just a great trade: They are solid investments for the long haul. To qualify for this status, a company needs staying power and a solid foundation -- plus that special sauce that sets it apart from peers and rivals.
Does Tesla Motors (NASDAQ:TSLA) have what it takes to become a blue chip stock? Let's see.
Bigger is better
Large companies tend to be more stable than small caps. Generous and stable revenue streams help a lot, and tend to be followed by very big market caps.
Tesla can hang with the big American boys when it comes to market cap. The electric-car maker's shares add up to $32.4 billion, and are gaining ground on Ford and General Motors. Less than two years ago, Tesla was valued at less than $5 billion.
So far, so good. But Tesla's potential blue chip credentials take a big hit if we're looking at revenue instead:
Oh, dear. At just $2.4 billion in sales over the last four quarters, Tesla looks tiny from a revenue angle. GM and Ford are at least 60 times larger on this metric.
Yes, Tesla is growing much faster than its rivals, but it will be eating Ford's and Chevrolet's dust for years to come.
What about profits?
Tesla turned its first quarterly profit just five quarters ago. Earnings have been positive ever since, but very jumpy: $0.11 per share in one quarter, $0.21 the next -- then back down to $0.10 and $0.04. In next month's third-quarter report, Tesla is expected to drop even further down, landing at roughly $0.02 per share.
Furthermore, Tesla still burns cash on a regular basis. Over the last four quarters, the company reported negative free cash flow of $197 million.
None of these numbers are helping Tesla's case for reaching blue chip status.
Does Tesla's balance sheet hold water?
OK, so Tesla is a minnow swimming with sharks, and is having a hard time making money at the moment. A rock-solid balance sheet could help the company make up for these deficiencies.
The company has $2.7 billion of cash equivalents on hand. That's enough to help Tesla finance several years' worth of negative cash flows as the company expands.
However, that's not the whole story. Tesla is also nursing $2.4 billion of short-term and long-term debt, most of which was was raised in the last four quarters.
Tesla is constructing a massive battery factory in the sands of Nevada. This is a necessary step toward eliminating a severe bottleneck in the company's manufacturing process, and a bet-the-farm kind of move. Tesla will be on the hook for about $2 billion of the $5 billion project.
So, some financing will be required. Tesla is getting its ducks in a row, making its balance sheet strain under the load.
Can Tesla Motors become a blue chip stock?
That $32 billion market cap makes Tesla look right at home among the industry's real blue chip stocks. Looking several years ahead, this is a growth stock with a potentially bright future, but many things could go wrong and tear the stock apart, too.
Tesla's production volume is disappointingly small, and will remain so until the battery bottleneck is removed. Reaching that milepost will require some steady nerves while the Gigafactory grows into its breeches. Until then, the game-changing asset is nothing but an expensive risk. The payoff at the end of the tunnel is enormous, but investors who get started with Tesla right now should expect plenty of turbulence on the road ahead.
Founder and CEO Elon Musk must overcome many challenges before Tesla passes into blue chip territory. Tesla has a spotty profit history, no cash generation powers to speak of, a short operating history in general, and a soft balance sheet to boot.
I own the stock, but with the full understanding that it's a high-risk, high-reward kind of bet. Tesla aims for nothing less than a complete makeover of the auto industry as we know it -- and that's just the start of even larger ambitions for Elon Musk. For a more detailed look at the risky innovation that makes Tesla an exciting growth stock, check out this slideshow.
But the blue chip talk stops right here. Tesla has a long way to go.