Musk’s Ambitions Could Take Investors On A Bumpy Ride: Tesla Motors Inc (TSLA)

Elon Musk SolarCity Inc (SCTY) Tesla Motors Inc (TSLA)

Tesla Motors Inc investors had better brace themselves as the firm’s CEO – Elon Musk – has set some very lofty goals. Speaking to investors over a call on Wednesday, Musk disclosed plans of accelerating his goal of producing 500,000 cars by two years to 2018. Most of these cars are expected to its forthcoming entry-level Model 3 for which nearl7 400,000 customers have already made deposits of $1000 each.

Elon Musk Tesla Motors Inc (TSLA)

What are the problems facing Tesla?

The fact that Musk has such lofty ambitions is not shocking. There are substantial cash and technical requirements involved in the project, and though these will bring potential rewards for the firm, at the same time will heighten operational and financial risks as well.  The new production target for 2018 is six times the anticipated output for this year, and also more than one-fourth of global BMW-branded sales in 2015, notes a report from CNBC.

As per Thomson Reuters estimates, Tesla is now trading at a whopping 180 times this year’s expected earnings despite the fact it has never ever made an annual profit. Its current valuation puts it at 44 times the profit that Wall Street analysts expect it to make in 2018.

Tesla Motors Inc needs to justify its sky-high valuation by making a certain number of deliveries. But it may not happen – production of Tesla Model X was slowed due to some speed bumps in the Q1. The EV firm announced the departure of two of its manufacturing executives shortly before announcing earnings on Wednesday.

Tesla intends to get its so-called Gigafactory battery facility running by end of 2016. The carmaker unveiled Model 3 in March, and expects the vehicle to start rolling off the assembly line in late 2017. Musk has long argued that supply is the major constraint for the firm and not demand. This explains the urgency the firm has around its annual production target of 500,000.

To hit these, the firm will need to make more investment. Now, the EV firm expects its full-year capital expenditure to come in above its earlier guidance of $750m, and it may also “require some additional capital.”

Tesla is familiar with the technical and operational risks it faces. On top of this the growing competition could make it tough for Tesla to carry forward the momentum. Based on this, the CNBC report asks investors to remember this physics concept, “the force with which an object crashes into an obstacle increases in proportion to its acceleration.”

What analysts think about Tesla?

Kelley Blue Book analyst – Mark Williams – said that though Tesla has reported narrower than expected loss, it is down by $75 million on the quarter. “Delivering 500,000 units by 2018 may prove to be a tough task. Tesla collected an estimated $400 million from refundable deposits on the Model 3, but may need to seek out more after announcing a 50% increase in capital expenditures. The pressure from building a Gigafactory (battery plant), delivering units ahead of schedule, and replacing valuable resources is going to pose some interesting challenges for the Tesla brand,” the analyst says.

Jim Cramer of The Street notes that Musk was “getting away with financial murder.” The expert believes the target of producing 500,000 units by 2018 is “preposterous.” Though Cramer is not planning to buy the stock, he thinks people will buy it because demand is “off the charts.”

S&P Global Market Intelligence analyst – Efraim Levy – maintains a ‘sell’ on Tesla Motors Inc . The pre-orders for the Model 3 suggest good demand for the vehicle, but the firm will have difficulty achieving the target since there are competitive offerings in the market, and it has lost key manufacturing executives as well, Levy notes.

Tesla is a company that so far hasn’t made a profit.  The value to shareholders is not based on profit today but rather on Musk successfully guiding the company toward some impressive goals.  The ride will be bumpy for investors but if in fact Musk can make Tesla the new leader in automobile manufacturing and sales, the rewards should be impressive. However, if you don’t have a stomach for rollercoasters, this stock will likely cause a bit of nausea.

All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.

Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.


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