It’s crazy to think that only a few short years ago, Tesla, Inc. (NASDAQ: TSLA) was still just a little-known car company trading at less than $30 a share. Yet today, investors are paying more than 10 times that amount to get a piece of what now ranks as the single-largest automaker in the world.
Tesla’s rapid ascent is cold, hard proof that investors are betting big on the proliferation of electric cars, but the question still remains whether or not Tesla will rise to meet such high expectations. This has become a hot-button issue over the last few years, with passionate arguments from both sides.
Ultimately, it’s a debate that will only be decided through time, but no matter who turns out to be right — the bulls or the bears — one thing is certain: this will end up being one of the biggest “told you so” moments in stock market history.
Whether you’re rooting for Tesla’s success, betting big on its demise, or still sitting on the sidelines waiting to pounce, understanding the risks involved with the company’s stock will be paramount to making the right decision for you.
Below, I’ve compiled a list of the five biggest threats facing Tesla and its shareholders today. If you have any stake in the direction of this stock, I urge you to consider each one thoroughly.
Risk #1: A Simple Case of Overvaluation
It’s no secret that Tesla’s stock isn’t cheap. Even company CEO Elon Musk himself has spoken out on numerous occasions hinting that investors could be paying a generous premium to get a piece of the company.
These comments date back as far as 2013, when Tesla was trading at just $173 a share, a mere fraction of what it trades for today.
Back then, Elon was perfectly explicit, saying, “The stock price that we have is more than we have any right to deserve.”
In 2014, when the stock was trading at $277, Musk warned investors again, “I think our stock price is kind of high right now. If you care about the long term, Tesla, I think the stock is a good price.”
And in May of this year (2017), when Tesla was trading at $313, the high-profile CEO shared, “I do believe this market cap is higher than we have any right to deserve. We’re a money losing company…”
Yet despite these numerous warnings, Tesla now trades at an incredibly pricey $350 a share. The company’s devotees will argue, of course, that they’re in it for the long term, but it’s difficult to justify the company’s current market cap regardless of time frame.
At a $59 billion valuation, Tesla is priced higher than General Motors (NYSE: GM), Ford (NYSE: F), and Bayerische Motoren Werke (ETR: BMW) — all of which pay annual dividends of 4.25% or higher.
This roughly works out to $800,000 per car sold in 2016, compared to just $5,000 per car sold for GM. Tesla would need to increase sales by a factor of 160 (somewhere around 11.7 million cars a year) to be valued accordingly.
While not entirely out of the realm of possibility, there is no doubt this level of market penetration would take time. After all, Tesla is currently aiming for just 500,000 deliveries by the end of 2018.
Give the company a decade and maybe it’ll get there… but that’s 10 years of 4.25% compounding dividends. Why risk your money on Tesla when you can just take the income from another auto manufacturer?
Risk #2: The End of Cushy Subsidies
We could go on for pages debating the merits and faults of government subsidies, but none of that is really relevant to their effect. The numbers here speak for themselves.
In 2015, Tesla sold 2,738 cars in Denmark. In 2016, after the government announced it would be phasing out subsidies, Tesla sold 176 cars, a drop of 94%.
And in Hong Kong, after the government cut its tax break earlier this year, Tesla sales plunged from 2,939 in March to zero in April and five in May.
In case you didn’t get that, sales plunged from nearly 3,000 a month to zero. With U.S. EV subsidies set to expire within a few short years, the alarm bells should obviously be ringing for Tesla and its shareholders.
According to timetables developed by Inside EVs, Tesla’s subsidies are set to be cut in half by the end of 2018, three-quarters by the second half of 2019, and removed entirely by 2020.
Based on Tesla’s own projections, the phase-out will begin even earlier (it will trigger once the company ships 200,000 vehicles). Not to mention, there’s the possibility those subsidies will be nixed entirely with Trump in the White House. Elon hasn’t exactly been making friends with the egocentric and notoriously spiteful billionaire.
Risk #3: Supply Chain Bottlenecks
One of the biggest threats to Tesla and its shareholders is the much-overlooked issue of the company’s critical supply chain. There are a number of major challenges Tesla will face on this front we could discuss, but none more serious than the company’s need for cobalt.
Cobalt, for those who are unfamiliar, is an essential metal used in the cathodes of Tesla’s battery cells. It is more expensive by weight than lithium, graphite, nickel, manganese, and virtually any other metal you might find in today’s rechargeable batteries.
Cobalt represents a major concern for Tesla because of how it is sourced.
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For one, the majority of cobalt (~60%) is derived from the Democratic Republic of the Congo, a politically unstable nation ranked seventh on the Fragile States Index. This leaves Tesla’s supply chain susceptible to a considerable geopolitical risk, as well as ethical concerns due to high rates of child labor at artisanal mines.
Further, a staggering 97% of cobalt is produced as a by-product of base metals nickel and copper. As a result, production levels are almost entirely dependent on nickel and copper demand instead of cobalt demand. This puts Tesla at risk of wild spikes in cobalt prices as demand outpaces supply, resulting in deficits that are all but guaranteed.
Macquarie Research is predicting an 885-tonne deficit of cobalt in 2018, 3,205 tonnes in 2019, and 5,340 tonnes in 2020. That’s a 500% deficit increase in just three years.
No doubt this is not only going to increase Tesla’s material costs, but it will also constrain its expansion unless the company can find a viable substitute such as a synthetic variant. My guess is that’s not going to happen anytime soon.
(If you’re interested in profiting from this inevitable demand for cobalt, my colleague Keith Kohl has all the angles covered here.)
Risk #4: Petrol Engine Innovation
One often-overlooked factor regarding the proliferation of electric vehicles is continued innovation in the fuel efficiency of petrol engines.
While EV manufacturers may tout their “zero-emissions” technology, the reality is that the cradle-to-grave emissions of today’s electric vehicles can run up to half that of petrol vehicles.
This is because a) the manufacturing emissions of an EV are significantly higher (as much as 69%, according to the Union of Concerned Scientists) than those of a petrol-powered car, and b) much of the electricity used to charge EVs still comes from non-green sources such as coal.
Of course, the environmental benefit of electric vehicles becomes greater the longer the car runs (assuming no battery replacement), but as fuel efficiency for petrol engines continues to improve, those benefits could diminish significantly over time.
Earlier this month, for instance, Mazda Motor Corp. (OTC: MZDAY) publicized a major breakthrough in petrol engines and announced plans to commercialize the technology by 2019.
Specifically, the company has developed a homogeneous charge compression ignition (HCCI) engine, which ignites petrol through compression rather than combustion. The design is expected to be 20–30% more efficient than today’s current combustion engines, further closing the emissions gap between EVs and petrol vehicles.
Risk #5: Employee Backlash
Elon Musk recently commented that Tesla is entering “manufacturing hell,” and many of the company’s factory workers would certainly agree.
According to incident reports from the Guardian, working conditions at the Gigafactory are incredibly harsh and potentially dangerous. Those reports reveal that ambulances have been called over 100 times over the last three years for workers experiencing fainting spells, dizziness, seizures, abnormal breathing, and chest pains.
Hundreds more were apparently called for injuries and other medical issues, according to Business Insider.
In a recent interview regarding these conditions, Elon admitted his workers have been “having a hard time, working long hours, and on hard jobs.” But Elon’s recognition alone isn’t going to stop the pending employee backlash.
In June, workers first began pushing for a union and sent a list of demands to the company’s board, much of which focused on improving equipment and reducing injuries at the Fremont factory. The letter indicates that these issues have been voiced repeatedly but have yet to be addressed.
Tesla even ran into an actual union in Germany after acquiring Grohmann Engineering last year. Workers at the automated manufacturing company began complaining in April that they were being underpaid by 30%.
Further, The Verge began reporting this week that engineers are leaving the company after voicing concerns over Tesla’s Autopilot feature. Specifically, these employees felt that Musk was brushing aside safety concerns, with one former engineer calling out “reckless decision making that has potentially put customer lives at risk.”
More likely than not, these problems will only continue to present themselves as Tesla continues its rapid expansion. Call them growing pains all you want, but they’re going to be pains nonetheless.
Until next time,
Jason Stutman
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