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  • Tesla, considering its nearly $27,000,000,000 market cap, is priced to perfection.
  • When a company is priced to perfection, the smallest change in investor sentiment can have large consequences on the stock price.
  • Longs currently are ignoring 20 key risks facing Tesla; once the market rationally assesses these risks, Tesla's stock will be repriced much lower.
  • Even if each risk has a 90% chance of NOT occurring, the odds that all 20 risks will not occur is only 12%.

With a market cap approaching $27,000,000,000, Tesla (NASDAQ:TSLA) is priced to perfection. Anyone who believes that Tesla is a buy or a hold at these levels must believe that Tesla is coated with Teflon and will execute its business plan flawlessly forever with little in the way of competition; in short, that nothing bad can ever happen to the company. While any investment requires a certain degree of faith, blind faith in any stock is usually a recipe for disaster. Set forth below are 20 key risks to Tesla's current stock valuation that I believe Tesla longs have not fully appreciated (if at all). If and when the market absorbs the fact that these (and other) risks actually exist for Tesla, I believe that Tesla's market valuation will be repriced much lower.

1. Tesla is Overvalued Using any Reasonable Valuation Metric

Analysis: CEO Elon Musk admitted several months ago that the "stock price that [Tesla has] is more than we have any right to deserve." At the time, the stock price was approximately $40 below the current price. When the CEO of a public company makes an openly bearish comment regarding his or her own company or industry, longs should sit up and take notice, as this is quite a rare occurrence. While such candor should be commended, it does not bode well for Tesla's stock price. As regards Musk's bearish commentary, Tesla longs appear to have adopted the ostrich approach, pretending as if Musk never said this. An analogous situation occurred in mid-2011, when shipper Frontline's (NYSE:FRO) chairman and largest shareholder was quoted as being unambiguously bearish regarding his own industry. Since then, FRO's market capitalization has plummeted over 70%.

2. Using the buzzword "disruptive" doesn't alter a company's intrinsic value

Analysis: The use of the term "disruptive" has become the 2014 version of what "eyeballs" was during the tech bubble, an omnibus excuse to justify any nosebleed stock price, no matter how absurd. Today, whoever believes that traditional valuation metrics should no longer apply to a company simply labels the company a "disruptor" and summarily dismisses Neanderthals who would try to assign a rational valuation thereto. Tesla is the poster child for such faulty arguments; indeed, a Google search for "Tesla" and "disruptor" recently returned over 2.2 million results. Unfortunately, no company is exempt in the long run from the laws of valuation. Price and valuation may diverge for a while, but the two will inevitably converge in the end. If Tesla cannot increase its intrinsic value at a huge pace over the next few years, the stock price will inevitably decline to reflect the company's actual valuation.

3. Momentum traders appear to control the stock, at least in the short term

Analysis: Tesla has been pushed to extremely high levels based on pure momentum. Short-term traders and other speculators in the stock market have caused this overvaluation to occur. Once the momentum crowd gives up on Tesla, the stock will reprice accordingly (i.e., much lower). A similar thing has happened to gold prices from 2011 to the present. Fear, as well as greed, is contagious among investors; once the tide turns, I believe that the momos will rush for the exits and Tesla's stock price will likely decline.

4. Delays could occur in getting the Model X and Gen 3 vehicle lines into full production on time

Analysis: The vast majority of Tesla's valuation lies in the future production of its Model X and Gen 3 vehicles. For example, the uberbullish Morgan Stanley report from earlier this year bases most of Tesla's DCF valuation on revenues and profits to be earned in the period from 2019 to 2028, when these vehicle models are expected to be in production. Any delay in the production schedules for these vehicles would result in a lower DCF for Tesla, and hence a lower stock valuation. Although Tesla appears to have exceeded its own schedule for the Model S, this is a niche vehicle, whereas the Model X and Gen 3 are expected to be mass produced, thus introducing far more execution risk.

5. Fuel cell technology could prove more cost-effective than batteries in cars

Analysis: Certain automakers are developing fuel-cell technologies that could potentially compete with EVs, perhaps "disrupting" the EV market. For example, General Motors (NYSE:GM) announced late in 2013 that its fuel-cell vehicles had topped 100,000 miles of real-world driving. Toyota (NYSE:TM) is also bullish on fuel cell technology, claiming that fuel cell vehicles are superior to EVs since they have

the zero-emissions of battery-powered vehicles and offer greater driving range and faster refuelling.

See also here. If fuel cell vehicles were to become commercially successful, demand for Teslas could drop dramatically.

6. Gas prices could decline over time on an inflation-adjusted basis

Analysis: There is clearly a risk, especially now that the drilling of shale oil has become prevalent in the US, that on an inflation-adjusted basis, the price of gasoline could decrease over time. Gas prices have declined domestically during the past year and have been largely flat during the past 3 years. Flat or lower inflation-adjusted gas prices would render EVs less desirable, since the fuel costs of owning ICE cars would correspondingly decline, undercutting one of the main selling points for proponents of EVs (i.e., cost savings on fuel). Consequently, the lower fuel costs go, the less demand there will be for EVs.

7. The Tesla gigafactory could have problems getting permitted, built on time or on budget, and/or operational issues could be encountered running it

Analysis: The gigafactory is expected to be one of the biggest factories ever built. It is estimated to be 10,000,000 ft² large. Longs are clearly ignoring the risks inherent in permitting, constructing and operating such a large scale facility. One only needs to look at the tortuous history of the Keystone Pipeline to know how difficult it is to build anything significant in the United States. What if the gigafactory encounters delays in being built? What if the facility has operational problems such that it never gets to full utilization? What if, even if the factory becomes fully operational, Tesla is stuck with millions of batteries it doesn't need and can't sell? Tesla has committed several billions of dollars to this facility, so any hiccup in the construction and/or operation of the facility could cost the company and its shareholders dearly.

8. The internal combustion engine, or ICE, could become significantly more fuel efficient over time

Analysis: Automakers have consistently improved the fuel efficiency of the ICE during the past 30 years. Indeed, CAFE standards and other governmental regulations will require significant increases in fuel economy over the next decade. Assuming the trend of the ever-more efficient ICE continues, the desirability of EVs versus ICE vehicles could actually decrease, rather than increase. All other things being equal, this would lead to a lower equity valuation for Tesla, as Tesla would simply not sell as many vehicles as analysts currently expect.

9. Tesla is a "jockey stock," with Elon Musk as the jockey

Analysis: As Apple (NASDAQ:AAPL) shareholders have found out the hard way, when a company is dependent on a CEO with cult status, the possibility that something could happen to the CEO introduces an extra risk to the company's equity that is not normally present. Musk clearly falls within the "cult CEO" category. If something were to happen to Musk, which rendered him unable or unwilling to fulfill his role as CEO of Tesla, the stock price would almost certainly plummet. Musk currently serves two masters, Tesla and SpaceX [not to mention chairing the board of SolarCity(NASDAQ:SCTY)]. Musk could easily become distracted by problems at SpaceX and/or SolarCity or burnt out with running so many companies; or he could simply turn his attention to yet another "disruptive" enterprise, such as the Hyperloop. Any of the foregoing would be at the expense of Tesla. After all, Musk is a serial entrepreneur at heart; it would be unreasonable to think he will devote the rest of his life solely to Tesla.

10. Tesla could overestimate the resale value of its vehicles and incur massive liabilities under the resale value guarantee

Analysis: Tesla has become part insurance company, now that it has instituted a resale value guarantee for its vehicles. If Tesla were to overestimate the residual value of its vehicles, it could be on the hook for hundreds of millions of dollars in liabilities. Tesla has not accrued any warranty expense with respect to the resale value guarantee. Any liabilities incurred by Tesla's resale value guarantee would need to be accrued at a future date, and would divert funds away from implementing Tesla's business plan. If longs need an example of the negative effect of warranty costs on a vehicle manufacturer, see those incurred by Navistar (NYSE:NAV). Navistar has been so haunted by its warranty claims that it has attracted the interest of Carl Icahn and other activist investors like a rotting carcass attracts vultures.

11. Another recession is pretty much inevitable in the next 10 years. The auto industry is highly cyclical, yet analysts' valuations of Tesla fail to take this into consideration

Analysis: The auto industry is highly cyclical and thus rises and falls in tandem with the economic cycle. Analysts have consistently failed to incorporate the effect of the economic cycle when they plot out Tesla's expected future earnings. Any valuation based on such projections should be viewed with deep suspicion. If another recession were to occur in the next few years, Tesla's business model could be severely strained. The effect this could have on the stock price is fairly obvious.

12. Vehicle manufacturers could start mass producing EVs that are on par with or better than Tesla's vehicles

Analysis: Longs apparently believe that Tesla has cornered the market on EVs forever. This could not be further from the truth. Every major OEM has plans for EVs to be produced in the future. And, in fact, most OEMs are already producing various hybrids and EVs. There is very little likelihood that the EVs produced by the major OEMs will forever be inferior to EVs produced by Tesla. If and when the era of the mass-produced EV arrives, competition for customers will surely be cut-throat. Stiff competition means lower margins for all producers, yet much of Tesla's valuation is based on an assumption that its extremely high profit margins will continue indefinitely.

13. Tesla may not install enough recharging stations in place to satisfy demand

Analysis: Tesla has a hugely ambitious plan to institute supercharger stations all across the United States, Europe and China. Any delay in the rollout of the charging stations could limit demand for Tesla's vehicle, as "range anxiety" could scare away prospective buyers. In addition, if Tesla were to fail to install an adequate number of charging stations, wait times for recharging could significantly increase (imagine the annoyance of waiting for a charging station behind 2 or 3 other vehicles, each of which needs 20+ minutes to recharge).

14. Electricity prices could increase substantially over time

Analysis: The case for Tesla as a smart investment decision for vehicle owners rests on the fact that EVs are supposed to save owners thousands of dollars a year and fuel costs. However, if electricity prices were to increase substantially over time or spike up, some, if not most, of these cost savings for owners of EVs could disappear. The greater the use of EVs generally, the greater the demand on the power grid, and the higher electricity prices will likely climb. The popularization of EVs could thus defeat, at least to some degree, one of the principal arguments used to defend the preferability of EVs.

15. Government subsidies for EVs will likely be reduced or disappear over time

Analysis: EVs have throughout their history been supported in the United States, Europe and China by government subsidies. Obviously, these subsidies will end at some point, at which time EVs will need to stand on their own as a value proposition without government assistance. Clearly, when there are no more tax credits available for the purchase of EVs, EVs will be less competitive on price versus ICE vehicles.

16. Musk has two CEO jobs right now; thus he is unable to devote his full attention to Tesla

Analysis: In a recent 60 Minutes profile, Musk told CBS's Scott Pelley that he works three days per week at SpaceX and just two days per week at Tesla. Importantly, there is little to no overlap or synergy between these two companies; if there were, one could make a reasonable argument that Musk serving in this dual role is not a negative for Tesla shareholders. Any time Musk spends pondering SpaceX's issues and challenges means Tesla gets short-changed (and vice versa). Longs apparently believe that a part-time CEO is acceptable; either that, or they simply fail to appreciate how little time each week Musk spends attending to his CEO duties.

17. Tesla has a documented track record of being less than forthcoming with relevant financial and other information. Often companies that hide data from the market get punished by the market

Analysis: Tesla in 2013 decided to stop giving out reservation numbers regarding their vehicles. Obviously, these numbers were and are highly relevant to investors. Why did Tesla arbitrarily decide to restrict the flow of information and disclosure? What were they so afraid of? Furthermore, why did Musk abruptly terminate an interview with Barron's last year when the reporter merely asked him about declining battery costs? What was Musk so afraid of in answering that question? This type of behavior by Musk and by the company raises red flags about their willingness to be forthcoming and answer relevant questions. Usually companies that attempt to hide financial data suffer from a valuation discount by the market, a risk to Tesla that longs currently appear to be underestimating.

18. Building a supercharger network across not only the United States, but also Europe and China, will be hugely expensive

Analysis: Longs have clearly not thought about the amount of capital expenditures that will be required to build out Tesla's supercharger network. Where will the money come from? Obviously the company will need to raise quite a bit of additional capital. One obvious source of this capital would be equity issuances. That means dilution for equity holders. In addition, Tesla has promised free electricity to vehicle owners forever at its charging stations. While this will surely delight Tesla's vehicle owners, it may not delight Tesla's actual owners (i.e., the shareholders) in the long run. Every dollar spent on subsidizing free electricity for vehicle owners will be one less dollar that can be distributed to shareholders or reinvested in Tesla's business.

19. EVs are actually costlier to maintain than ICE vehicles

Analysis: According to this article, EVs cost more to maintain than ICE vehicles, despite Tesla's claims to the contrary. If and when the truth about the ongoing costs of EVs versus ICE vehicles becomes widespread, the desirability of EVs vis-à-vis ICE vehicles will likely decline.

20. Tesla may have violated U.S. securities laws in the presentation of its non-GAAP financial numbers

Analysis: According to this article, when Tesla issued its 3rd quarter 2013 earnings press release, it failed to comply with the securities law requirement that says, "companies must give 'equal or greater prominence' to GAAP numbers when they present their financial results." Whether Tesla violated the letter of the law or not would be up to the SEC to decide, however law firms are already using this example as a reason to file class-action lawsuits against Tesla. While ingenious longs will certainly be able to come up with arguments why GAAP financials should be ignored, Tesla does not have the right to disregard securities laws.

In conclusion, I believe that the above 20 key risks (not to mention other risks) will inevitably deflate TSLA's bubble stock valuation. Longs will respond by arguing that these risks are extremely unlikely to occur, in fact. However, longs should consider the following simple math: If each of the above risks has a 90% chance of NOT occurring, the chance that ALL 20 risks will not occur is a mere 12% (or 0.90 ^ 20). Are longs really willing to roll the dice on an investment thesis that won't come true 88% of the time? With Tesla, it currently appears that this is the case (with the emphasis on the word "currently").

Source: Tesla - 20 Key Risks That Longs Are Ignoring