Founder Elon Musk is a controversial superstar in the technology industry, and Tesla's Silicon Valley roots have boosted investor expectations. Tesla attracted even more attention in the summer of 2018 after Musk began talking about taking the company private – something that, after much controversy, the company announced it is not doing.
The future of Tesla cars has exciting potential but remains difficult to predict. TSLA investors should temper their expectations and consider how the risk factors that Tesla may face over the next five to 10 years could jeopardize future returns.
1. Tesla Cars Will Remain Too Expensive
Even with generous government incentives, such as tax breaks for alternative technology, potential consumers of Tesla's Model S are still faced with large price tags between $68,000 and $138,000 or even more depending on options. Even Tesla's new lower cost option, Model 3, is $45,000 before tax incentives and gas savings — which is still a steep price for many people.
The cars are not only expensive for consumers to purchase, but they're also costly for Tesla to make. Vertical Group analyst Gordon Johnson estimated that in the first quarter of 2018, the company lost about $14,000 on each of the Model 3 vehicles it sold.
2. Tesla Could Run Out of Batteries
One of the early problems Tesla executives ran into was a lack of batteries to power their products. Tesla's world-renowned Gigafactory, which as of October 2018 was still under construction in Sparks, Nevada, is supposed to solve the company's battery crisis. The lithium-ion superstructure, which has a footprint of more than 1.9 million square feet, projects to help ramp production to more than 500,000 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 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.
3. Low Gas Prices
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 global oil production increasing every year from 2009 through 2017. 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 continues to improve.
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.
4. 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 Bolt and the Nissan Leaf, failed to gain early traction because of high retail prices and limited driving range. But in 2018, Nissan announced a new Leaf that starts at $29,999, with a range of 151 miles and the ability to receive 90 miles of charge in half an hour. The 2018 Bolt, at $37,495 with a range of 238 miles, offers more than the 220-mile range of Tesla's standard Model 3. Other companies plan to enter the electric car market in the next few years, including Mercedes-Benz, Volkswagen, Subaru, Ford and BMW. If this happens, then 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."
5. 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 a 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.
6. 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.