Pegged by many as perhaps the high-risk, high-reward stock of 2015, and 2014, and 2013 and so on, Tesla Motors, Inc. (NASDAQ: TSLA) ranks among the most interesting companies in the world. Founder Elon Musk is a superstar in the technology industry, and Tesla's Silicon Valley roots have created even more attention and expectations. However, the company remains a startup, and many question whether its transformative potential will ever translate into earnings and dividends.
The future of Tesla cars is very exciting but remains difficult to predict. Every TSLA investor should temper his expectations, since any number of variables could jeopardize future returns. The following are some of the biggest risks facing Tesla motors over the next five to 15 years.
Tesla Cars Will Remain Too Expensive
In the second quarter of 2015, Tesla delivered just over 11,500 cars to market. Most of these cars were built to order, purchased by the wealthy and the future-focused. The company also reported a Q2 operating loss of more than $46 million, which spreads out to an operating loss per vehicle of $4,000. In other words, the company lost $4,000 for every car sold.
Even with generous government incentives, such as tax breaks for alternative technology, potential consumers of the Model S are still faced with large price tags between $70,000 and $110,000 or even more depending on options. In an economy where wages are stagnating, and food and energy costs keep rising, it is difficult to justify splurging on the latest car technology.
Tesla Will Run Out of Batteries
One of the early problems TSLA executives ran into was there did not seem to be enough batteries to power their products. Tesla's world-renowned "gigafactory" is supposed to solve the company's battery crisis. The lithium-ion superstructure, which is rumored to be as large as 10 million square feet, projects to employ 6,500 people and produce greater than half-a-million Tesla cars annually.
Major projects such as the gigafactory are often plagued with logistical or regulatory hurdles, and it remains to be seen if the factory can be completed on time. The Nevada government has given the green light to TSLA, even boasting the gigafactory will produce $100 billion in additional economic activity over the subsequent decades, but growth projections for the company suggest it cannot afford a long hiccup in construction.
Musk has even hinted the company will need several gigafactories to handle battery demand, at least according to Tesla Powerwall estimates. It is going to take an incredible amount of capital expenditures, or CapEx, to keep the company fully charged and shareholders happy.
Gas Prices Remain Low
When gas prices tumbled in 2014 and 2015, Tesla lost some of its luster. After all, gasoline-powered cars compete with Tesla's products, and declining gas prices make gasoline-powered cars more economically attractive. Gas prices do not have to remain at decade lows to damage TSLA stock prices; gas just has to remain inexpensive relative to driving a Tesla product.
TSLA's gas quandary comes from two angles at once. The first problem is increased global production in oil; the once dominant "peak oil" theory seems to be debunked, with production far greater in 2015 than in 2005. Oil companies are getting better at finding oil and, with the help of hydraulic fracturing and horizontal drilling, they are also more effective at extracting oil.
Petroleum supplies are increasing and, at the same time, internal combustion engines are more fuel-efficient. According to the Bureau of Transportation Statistics, the average fuel efficiency of light-duty passenger cars in the United States increased from 22.6 miles per gallon in 1980 to over 35 miles per gallon in 2013.
If Tesla is going to transition into a mainstream auto manufacturer and generate consistent cash flow, it needs to sell a lot more cars. Consumers are less likely to transition to electric cars if petroleum-based fuels remain a far cheaper alternative.
Increased Electric Vehicle Competition
Tesla is not the first company to create electric cars. Interestingly, the first electric automobiles were probably created as early as 1834 by Thomas Davenport, but Tesla seems to be the most successful, thus far.
Two notable competitors, the Chevrolet Volt and the Nissan Leaf, failed to gain early traction because of high retail prices and limited driving range. But Nissan announced a new 2016 Leaf with 25% more mileage before a recharge, and other companies plan to enter the electric car market in the next few years, including Mercedes-Benz, Volkswagen and BMW. Tesla's market share may start to get crowded.
Some tech companies may also join the fray; Apple, Inc. and Google, Inc. believe they can challenge Tesla in the futuristic transportation industry. Tesla is admittedly concerned about businesses with broader existing consumer bases. In a 2015 filing, management acknowledged that "virtually all of our competitors have more extensive consumer bases and broader customer and industry relationships."
There is an old saying in the business world: "First there are the innovators; then there are the imitators." Tesla spends an astronomical amount of money on CapEx, but other companies might make more money by repackaging something Tesla initially created.
Tesla May Never Recoup Massive Capex
Musk once famously noted about his company: "We are going to spend staggering amounts of money on CapEx." Lots of investors like to see high capital expenditures, but there has to be payoff on the other end. This seems particularly true in an infant industry paved with failed startups.
Development for the Model 3 and Model X cars has already received billions in CapEx. The battery factory comes with its own hefty price tag. Tesla spends about one-fourth as much on CapEx as General Motors Company, despite the fact that GM is more than 20 times as large.
A Part-Time CEO
Hidden in a 2015 TSLA 10-K filing was a note about Tesla's over-reliance on the genius of Elon Musk. This is not particularly shocking, especially in the technology sector; think Steve Jobs and Apple. What is disturbing is what immediately followed in the report. The report reads, "We are highly dependent on the services of Elon Musk" and in the very next sentence highlights, "he does not devote his full time and attention to Tesla."
Musk is a very active executive. He was once CEO of PayPal before starting Tesla, and has since become CEO and Chief Technical Officer (CTO) of Space Exploration Technologies. He is also Chairman of SolarCity, which installs expensive solar equipment.
Wall Street investors are increasingly sensitive to "key person risk," or the threat of losing a crucial member of a company. The critical question is: How many investors would still hold Tesla stock at current prices if Elon Musk were no longer involved in the company? For example, Berkshire Hathaway has Charlie Munger and a long-standing board to take over if something happens to Warren Buffett. Tesla does not have a "Plan B" if Musk is unable to devote enough time to keep the company moving forward.