Forbes says Tesla stock risky, but poised for big gains

Forbes reaffirmed its optimistic outlook for Tesla Motors’ stock, while noting three major risks that could put the brakes on the bull.

 

Last week, Forbes, a venerable business magazine that’s generally skeptical of non-hydrocarbon-based transportation technology, reaffirmed its optimistic outlook for Tesla Motors’ stock, while noting three major risks that could put the brakes on the bull. Forbes has set a price target for TSLA of $41. On Friday, it was trading around $29.

Tesla’s strong points are well known: it has a unique product, a charismatic leader, deep-pocketed fans and a respectable backlog of orders – the company has taken 12,200 reservations for the new Model S sedan. However, in order to start filling those orders, Tesla is going to have to ramp up production incredibly fast. The company’s production goals are 5,000 units of the Model S this year and at least 20,000 units annually thereafter. As of last week, it had produced 100. Unforeseen supplier delays or quality control issues could be disastrous.

A second risk involves long-term demand. Tesla CEO Elon Musk has said that he expects EVs to account for half of all cars manufactured 20 years from now, a prediction that conservative Forbes calls “highly optimistic to say the least.” Also, the big boys aren’t likely to sit idly chatting while Mr. Musk removes their lunch from the table. Forbes says:

Tesla…is currently a pioneer in the electric vehicle industry, and the technology in the Model S is on par with any other premium sedan. However, other auto companies are catching up, with luxury manufacturers BMW and Audi having launched electric cars recently. Ford, GM, Nissan, Honda and Toyota have all either launched an electric vehicle already, or are in the process of doing so. While Tesla can boast of its cutting edge technology, many of its competitors have been around for generations, and have manufacturing facilities capable of achieving production rates which Tesla can only dream of at this point. Furthermore, they have well established service networks and have developed strong customer loyalty over the years. Why would a customer interested in purchasing an electric car pick a Tesla over any of the others?

Finally, Forbes pointed out that Tesla’s financial health is heavily dependent on the success of a single model. Management is counting on cash from sales of the Model S to cover its working capital requirements in the near future. The company has managed to increase gross margins over the last three years, and expects to become profitable in 2013. Any bad financial news could sabotage its plans to launch two new models – the Model X crossover in 2014 and the Gen III hatchback in 2015.

 

Source: Forbes
Image: jurvetson (flickr)