Elon Musk is commonly referred to as the real-life version of Tony Stark. The billionaire inventor is redefining how humans travel, in space as well as on earth. In fact, Musk is so set on challenging the status quo that he currently serves as chief executive officer to arguably the two most exciting companies in America: SpaceX and Tesla. The latter is publicly traded, but that doesn’t necessarily mean you should buy the stock. Let’s take a look at three things you need to know before buying Tesla.
Tesla certainly produces a high-quality automobile that investors can get behind. The Model S comes equipped with the highest safety rating in America from the National Highway Traffic Safety Administration — five stars in all categories. Tesla credits much of its safety to the unique electric drivetrain that sits below the car’s aluminum occupant cell in its own subframe, which lowers the car’s center of gravity and minimizes rollover risk. The engine block is also replaced with impact-absorbing boron steel rails. In the event of an accident, eight airbags protect front and rear occupants, and the battery system automatically disconnects the main power source.
In February, Consumer Reports ranked the Tesla Model S as the best overall vehicle on the market for the second consecutive year. “For all of the impressive new vehicles released in 2014, none was able to eclipse the innovation, magnificence, and sheer technological arrogance of the Tesla,” CR explains. “Through the course of their life cycles, cars become obsolete quickly as newer models appear with updated gizmos. But with Tesla’s over-the-air software updates, a Model S that came off the line in 2013 has many of the same new features as one built today.”
Quality doesn’t come cheap. By Musk’s own admission, the Model S is a “compelling car that’s too expensive for most people.” This is quite evident by looking at Tesla’s latest financial results, in case the $70,000 price tag wasn’t already enough evidence. The company appeals to a small market, shipping less than 33,000 vehicles last year. Sales in China have also slowed due to communication issues surrounding the availability of charging points.
For the three months ended December 31, 2014, Tesla reported a net loss of $0.13 per share on $1.1 billion in revenue. That is down from a profit of $0.33 per share in the same period last year, with $761.3 million in revenue. In comparison, analysts expected Tesla to earn $0.31 per share in the fourth quarter on about $1.23 billion in revenue. Despite the disappointing results, Tesla expects to get back on track in 2015 and beyond.
This year, Tesla expects to deliver 55,000 vehicles, up more than 70% from 2014. Entering 2015, Tesla had more than 10,000 orders for the Model S and almost 20,000 reservations for the Model X, its soon-to-be-released electric SUV. Furthermore, Tesla is working on the Model 3, a less-expensive electric vehicle expected to launch in 2017, with a starting price of $35,000 before tax incentives. The lower model should help Tesla gain market share, but the stratospheric stock price is still an ongoing issue for potential investors.
Much like the Model S, shares of Tesla are quite expensive, even after crashing 37% in only four months. As the chart above shows, shares are well below their all-time high of $291 made in September and remain in a noticeable downtrend. Therein lies the problem: How much is Tesla really worth considering it’s not your average car company?
Traditional valuation measures seem to be useless in this case. Tesla’s presence in the auto market is barely noticeable on a sales level, but it already has a market cap of $25.5 billion, almost half that of General Motors, which sold nearly 3 million vehicles last year in the U.S. alone. Surprising even his biggest fans, Musk recently suggested that Tesla could be worth $700 billion by 2025. Keep in mind that Musk doesn’t even expect Tesla to be profitable until 2020 due to capital investments and limited market share.
Investors considering Tesla need to recognize that shares will supercharge your portfolio with risk and volatility — not exactly what every investor desires, but the possibility of great rewards can be tempting. Expectations are still high at its current stock price, electric competition from other automakers will increase, and the smallest speed bump has the potential to send shares skidding once again. Musk is undoubtedly the right CEO to lead Tesla on its quest to change the world, but even Iron Man falls back down to earth every now and then.
Follow Eric on Twitter @Mr_Eric_WSCS