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Tesla: Potential to Change the World, but Overvalued

The cutting-edge automaker has incredible growth potential, but given the immense uncertainty it faces in the coming years, the stock is overvalued at current prices.


David Whiston: Tesla Motors (TSLA) recently took advantage of its halo status in the market by issuing nearly $750 million of equity. Cash burn actually became a concern on the last earnings call because cash had fallen to $1.2 billion thanks to a $1.1 billion burn in the first half of the year, with more launch costs still to come for the Model X crossover out this month after a multiyear delay--plus Model 3 investment for its release in late 2017.

Tesla has potential to change the world; however, we think the stock is overvalued, even after giving the company all the benefit of the doubt about its ability to sell all it produces. It's important to remember that despite the massive hype surrounding Tesla, the gigafactory currently under construction in Nevada will only allow the company to make 500,000 units a year by 2020. That would be fine if Tesla only wanted to sell cars to rich people, but CEO Elon Musk has been clear that the company's mission is to bring sustainable electric transport to the mass market. To do that, an automaker needs scale. And to get scale, Tesla will need to sell millions of vehicles a year. It will sell probably just over 50,000 this year, so there's a long way to go. In the meantime, Asia, the U.S., and Europe will inevitably have more recessions that Tesla will need to survive. This stock, in my opinion, is priced for perfection--and that's very dangerous.

To sell more vehicles and more batteries for its storage business called Tesla Energy, Tesla needs more gigafactories. Gigafactories currently go for about $5 billion. Elon got supplier partners to pay for about 60% of this one, but we can't assume that will always be true. Tesla has incredible growth potential with vehicles and energy storage, but people forget that this growth isn't free.

On the positive side, if Tesla can continue to reduce its battery costs, it has the potential for a cost advantage that could never be overcome by internal-combustion manufacturers. Even with that cost advantage, we want to see the vehicles have more range, as gas and diesel vehicles can go about 500 to 800 miles on a tank compared with nearly 300 on a single charge for Tesla. Still, the stock has immense uncertainty, up or down, and immense key-man risk with Elon Musk, who we do not think will remain CEO beyond the launch of the Model 3.

Tesla's magic is in its battery technology, which has applications beyond autos. If it really wants to bring sustainable electric transport to everyone to abate a carbon crisis, then we think it should stop competing with the automakers and just be a battery manufacturer. There's lots to like about Tesla, and it's an incredibly interesting story; but we think investors should consider downside risk and the immense uncertainty surrounding such a young company before paying for a lot of potential.

David Whiston does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.