Tesla Inc. (NASDAQ: TSLA) used to be a small car company with its stock trading at around $30 a share some 6 years ago. The story is different today, with investors having to cough up about $350 to own a part in the company. Of course, Tesla is now rated as one of the largest automakers in the world by market valuation
Tesla stock is rising at an incredible pace, a testament to investors’ belief in the future of electric cars. The question however is if Tesla will be able to rise to this hype. There are serious arguments for and against Tesla’s long term survival. It seems such arguments will stay around a little more. Irrespective of your investment thesis on Tesla, below are five potential headwinds for the stock.
Matter of Overvaluation
It is obvious that Tesla shares are not cheap. Even Elon Musk, the company’s CEO confirms that his company’s stock might be somewhat pricey. His comments date back to 2013 when Tesla was trading at just $173 per share, a fragment of its market worth today.
In that year he said, “the stock price that we have is more than we have any right to deserve.” In 2014 when the stock was selling at $277 per share he warned again that, “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.”
He repeats his stand in May this year when the company’s share was trading at $313 per share, today, Tesla’s share is above $350 and investors are eager to keep trading it.
At market cap of $59 billion, Tesla is valued higher than three major automakers already in the market: Ford, General Motors, and BMW. Interestingly, the three companies pay annual dividends of 4.25% on the average more than Tesla.
Tesla is aiming for 500,000 vehicle deliveries by 2018 and it would be a while for Tesla to have as many cars on the roads either GM or Ford. I would say Tesla another ten years, perhaps it will catch up to General Motors on volume. However, you should remember that will be ten years of 4.25% dividends compounding.
End of subsidies
We can spend the whole day debating governments subsidies on Tesla, but the facts below are scary, if you are in doubt on how subsidies are helping Tesla to sell.
Tesla sold a record 2,738 cars in 2015 in Denmark. By the time, the government announced phasing out subsidy in 2016, Tesla sales plunged to just 176, a loss of 94% in total sales in a year.
After government cuts its tax break in Hong Kong, Tesla’s sales plunged from 2,939 in March to a ridiculous zero in April and just five units sold in May.
This is the fact, sales plunged from almost 3,000 to zero in the absence of subsidy, and the fear continues with the U.S . EVs subsidies set to expire soon. What will be the fate of Elon Musk and his EVs when Uncle Sam stops bankrolling EV subsidies?
Supply chain problems
One of the biggest threats to Tesla motors is possible supply chain headwinds, yet investors and the company’s management overlook it. Tesla’s dependence on cobalt is a serious problem waiting to unfold.
Cobalt is an important metal used in the cathodes of Tesla’s battery cells. It is more expensive than Lithium, nickel and other metals used in the making of battery cells. Approximately 60% of cobalt is sourced from the Democratic Republic of the Congo, a politically volatile nation ranked seventh on the fragile state’s index. Unless Tesla is able to guarantee a solid supply chain for Cobalt, its fate is as undecided as the fate of the Congo.
Innovations in petrol engine
EVs manufacturers claim zero emissions, without paying attention to fuel efficiency landmarks achieved in petrol engine cars.
The truth is; the manufacturing emissions of EVs are higher, around 69%, according to the Union of Concerned Scientists than those of petrol engine cars. In addition, a large chunk of energy used to charge EVs are from non-green sources.
Employees backlash looming
Elon Musk’s comment that Tesla was entering ‘manufacturing hell’ was true. Many workers will accept this fact. Working conditions at Gigafactory is harsh and dangerous according to reports.
Those reports claim that ambulances have been called more than 100 times in the last three years, for working having issues like abnormal breathing, seizures, chest pains and much more, with several others for injuries and other medical needs.
Trading in Tesla’s shares may be a worthy risk to those who are risk takers, but we see that the future of Tesla may not be as bright, the press may continue to make noise about the future of EVs, it’s a matter of time that will shall all face the reality.