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Troubled By Tesla

Recently, Tesla, the electric car company, set another record. However, instead of a speed record it was a financial one as investors bid Tesla’s stock above $310 per share. In the process, this valued the entire company at $51 billion—more than either GM or Ford. At a minimum, the growth of its stock price has been impressive—especially for a company that did not exist 15 years ago.

With all the Tesla excitement, should you jump on board and invest in the company too? Here is some food for thought:

Tesla, with its iconic founder Elon Musk, has been revolutionary to the car business. The technology implemented by Tesla is high on the “wow factor” delivering performance straight out of science fiction. According to a recent test by Motor Trend, the Tesla Model S, with new software updates, accelerated from 0 to 60 in 2.28 seconds. That makes it faster than a 949 horsepower Ferrari LaFerrari. This is even more impressive when one considers that the Model S is a 5,000 pound sedan!

However, as I counsel my students in the investment program at Texas Lutheran University, just because you like a given product does not make it a good investment. Unfortunately, Tesla fits in this category.

Last year, GM sold about 10 million vehicles while Ford delivered more than 6.6 million. For their efforts, they both produced revenue of more than $150 billion. Tesla sold 76,000 cars which produced $7 billion in revenue.

More importantly, GM and Ford realized net income of $9.4 billion and $4.6 billion respectively while Tesla lost $800 million. Despite high debt loads and losses, investors keep driving the stock higher.

I have not seen people fall in love with an “idea stock” like Tesla since the 2000 Tech Bubble.

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Tesla obviously has its following. In fact, there is more demand than they can currently supply. However, meeting that demand requires raising large amounts of money. Over the past three years they have raised $3 billion to build factories. This year it looks like they will need to raise another $2 billion.

However, Tesla supporters argue that this is okay because it is really a technology company. This is an important distinction. Over time, technology prices come down because of innovation and scale. Whether it is broadband, servers or software the more people you can sell it to the cheaper the per unit cost becomes. Is this true for Tesla?

Certainly, there are many technological components that Tesla makes. However, at the end of the day, they are still a manufacturing company. This requires a massive investment into plant, property and equipment. Unfortunately, unlike technology, plant, property and equipment not only wears out over time—but it is more expensive to replace due to inflation.

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If you can set aside the capital requirements of Tesla there is another flaw that must be addressed. Investors currently look at Tesla as if they are going to be the only auto maker delivering technologically advanced vehicles and they will always maintain “first mover advantages.”

Therein lies the real fear for Tesla investors—the fact that every other auto maker in the world is bearing down on them. The competition is coming from traditional incumbents like Ford, GM, Volkswagen, Jaguar, Mercedes and BMW. However, there are start-ups like Lucid Motors who are already producing an all-electric car capable of 217 mph!

Additionally, the traditional auto makers, like Toyota, have been pairing gas engines with an electric motor which results in a highly efficient hybrid. But they aren’t the only ones. Porsche’s 918 hybrid delivers nearly 900 horsepower and an incredible 70 mpg!

The gas electric hybrids offer one other benefit—an extended driving range. The current Tesla models have a range of about 250 miles before needing a charge. That doesn’t even get me to Austin and back without a lengthy pit stop and the drive to Dallas is out of the question.

My conclusion is that Tesla belongs in the “too hard” pile. Maybe they can maintain their lead over established car makers. Maybe they can raise enough money and grow into their extended valuation. There are lots of “maybe’s” with Tesla.

As such, it is much easier for the intelligent investor to enjoy driving the car, just not the stock.

Dave Sather is a Certified Financial Plannerand owner of Sather Financial Group. His column, Money Matters, publishes every other week.