Tesla's Model S sedan. Source: Tesla Motors.
What could possibly go wrong with Tesla Motors (TSLA 3.59%) stock?
Before you say "nothing," read on. There are a lot of things that could go wrong with even the "safest" stock. Natural disasters, expensive product recalls, executive misconduct... it's a long, long list.
But Tesla is far from the "safest stock." In fact, it's arguably more speculation than an investment in the traditional sense, given that Tesla hasn't generated much in the way of profits so far.
Often, when investors buy a stock, they're buying into a story, an idea of how things could play out. That's exactly the case with Tesla: The company has a terrific story about how things will unfold over the next several years, and Tesla's success so far makes the story seem plausible -- but it's still a story.
What could go wrong with it? Let's take a look.
The story that is supporting Tesla's stock price
The gist of the Tesla story is this: By adding an SUV (the Model X, due later this year) and a more affordable "mass market" sedan (the Model 3, due in early 2016), Tesla will take its annual sales from 31,655 cars in 2014 to 500,000 by 2020, and to "millions" by 2025.
To support that giant leap in electric-car production, Tesla and Panasonic are building a massive battery "Gigafactory" in the Nevada desert. Tesla CEO Elon Musk also recently announced a new product line under the Tesla Energy brand called Powerwall: battery packs for home and commercial electricity storage that could (there's that word again) turn into another huge business in time.
That's the Tesla story in a nutshell. So, what's it worth? About $250 a share, says the market as I write this. Tesla lost $2.36 per share in 2014, so that valuation isn't built on a multiple of earnings.
It's built on the story. And there are some hard questions to be asked about that story. Some of those questions have to do with the new Powerwall products -- how much potential is really there?
But I want to focus on another big one: What if the market for "premium electric vehicles" turns out to be limited -- and the big guys decide to steal it?
A problem: Some serious competition is coming
Right now, today, there's no direct competitor to Tesla's Model S on the market, although BMW's electric i3 sedan and hybrid i8 sports car have probably stolen a few Tesla sales. But it's clear that direct competition for Tesla is coming. After months of hints and speculation, Audi CEO Rupert Stadler made it official last week: Audi will introduce an all-electric SUV "by 2018." It'll have a "very emotive," "sporty" design, he said, and a range of "more than 500 kilometers," or about 311 miles.
That won't be aimed at the Model S, exactly. But it sure sounds like it's aimed squarely at the next Tesla, the Model X SUV due later this year, which is expected to have around 250 miles of range. By announcing its vehicle now, Audi may be hoping to preempt some Tesla sales.
Audi is part of the massive Volkswagen Group (VLKAY 1.64%), and VW has committed serious money to this effort. The Audi SUV -- which may be called "Q6" -- is expected to be just the first in a series of EVs from the VW Group's premium brands. (The second is likely to be a Porsche sedan. That will be a direct competitor to the Model S, or its successor, if Tesla manages to launch one by then.)
Meanwhile, on the not-so-premium end of the market, a couple of big names are already looking to preempt Tesla's "affordable" Model 3, which the company says will start around $35,000. But Tesla's engineers appear to have done very little work on the Model 3 so far, and no design concept has been shown yet -- although Musk has promised that the company will show one in March 2016.
But the affordable-EV-with-good-range market could be a bit crowded by the time the baby Tesla arrives. An all-new version of Nissan's Leaf is expected to arrive at dealers late next year as a 2017 model, and CEO Carlos Ghosn has said that the company is aiming for 200 miles or more of range. And General Motors (GM 1.50%) surprised us in January with its all-electric Chevrolet Bolt, which it says will have 200 miles of range at a target price of "around $30,000."
In a surprise, GM revealed the all-electric Chevy Bolt concept in Detroit in January. The production version of the Bolt, expected as a 2017 model, could dent demand for Tesla's upcoming Model 3. Source: General Motors.
While we haven't seen the all-new Leaf yet, the Bolt isn't "vaporware": GM has confirmed that the Chevy Bolt will be produced at a plant in Orion, Michigan, probably starting late in 2016 or early 2017. The company is investing $200 million in tooling to make the car, and it appears to be scaling up for production in the neighborhood of 25,000 to 30,000 Bolts a year.
Another problem: The total market for electric cars is still quite limited
That number is telling. GM could easily scale up to make 10 times that many Bolts. But it isn't, because the market for "electrified vehicles" hasn't grown all that much.
"Electrified vehicles," a category that includes conventional hybrids, plug-in hybrids, and fully electric cars, made up just 2.3% of the U.S. market in 2008, and 3.3% last year. Most of those were conventional hybrids: InsideEVs estimates that only about 320,000 "plug-ins" -- plug-in hybrids and battery-electric cars -- were sold worldwide last year. About a 10th were Teslas.
The sales just aren't that big yet, in other words. So, how is Tesla going to sell 500,000 in just five years -- when bigger, better-funded competitors are already angling for big slices of the market?
Here's what could go wrong with Tesla Motors
To answer the question in this article's headline, one of the big things that could go wrong with Tesla is that its sales growth could easily fall well short of the lofty expectations baked into its current stock price.
If that happens, it's unlikely to be the end of Tesla -- although its stock price could take a very big tumble. And it's possible Tesla will meet its lofty goals. Demand for electric cars could accelerate sharply over the next few years as better and cheaper batteries come to market. It's even possible that Tesla could be the company that makes that happen.
But it's a really big question, and it's a big reason a lot of investors and industry experts remain skeptical of Tesla Motors.
