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Founded just 13 years ago, electric-car maker Tesla Motors (NASDAQ: TSLA) has exploded onto the scene. But if Tesla CEO Elon Musk gets his way, the company is only just getting started. The CEO believes Tesla's annualized vehicle production rate is about to soar from 100,000 units today to 500,000 units in 2018 thanks to the company's upcoming lower-priced Model 3. And this doesn't even take into account Tesla's nascent energy storage business, which management hopes will help accelerate the world's transition to sustainable energy.
But the stock has struggled recently, down about 10% during the past two years. Is this a buying opportunity for investors? Or do a pricey valuation and rising competition make the stock a hold -- or even a sell?
When the Fool asked its 636,000 followers on Twitter about Tesla's investment prospects, the majority was clear: It's time to buy Tesla stock.
Polled in September when the stock was trading at about $196, or about 2% below where it is at the time of this writing, 48% of the 3,206 surveyed respondents thought Tesla stock was a buy, 29% thought it was a hold, and 23% believed it was time to sell.
As investors ponder whether or not they should add Tesla stock to their portfolio, here's a look at both the bear and bull case for the stock.
There are three common bearish narratives for Tesla stock: a pricey valuation, rising competition, and uncertainty surrounding Tesla's ability to execute on its big vision for the future. All of these arguments against buying Tesla stock are important risks to consider, so here's a look at each.
Valuation risk: Tesla's frothy valuation becomes immediately clear by the company's enormous market capitalization of $30 billion. This figure is more than half of General Motors'$49 market cap, even though Tesla is expected to deliver around 79,000 vehicles this year and General Motors is selling about 10 million vehicles annually. Investors obviously have huge expectations for Tesla's growth.
With the stock essentially priced for Tesla to become a mass-market player, a pricey valuation today could prove to be a reason for modest or even negative returns in the future if growth doesn't pan out as optimistically as management hopes.
Competition risk: Starting with General Motors' all-electric Chevy Bolt, which will start shipping later this year, Tesla is about to go head-to-head with many new electric vehicle automakers. In the last two years, essentially every major automaker has announced big plans for electric vehicles.
Some investors worry that new entrants to the EV space with 200 or more miles of range, particularly General Motors' Bolt, since it starts at about half the price of Model S and comes about a year ahead of Tesla's lower-cost Model 3, could wear on Tesla's head start.
Execution risk: Then there are concerns about Tesla's ability to execute on its growth plans. Even if demand for Tesla vehicles and energy storage pans out to be as optimistic as management anticipates, execution missteps could mean the company fails to take advantage of market opportunities.
It goes without saying that the auto business is one of the most capital-intensive industries; if Tesla fails to generate enough capital for the required upfront investments needed for growth, or fails to ramp up manufacturing as quickly as it hopes, Tesla may end up getting taught a lesson by well-capitalized and experienced incumbents.
Still, Tesla does have some things going for it -- namely momentum, a first-mover's advantage, and rapidly increasing demand for its vehicles.
Even bears are unlikely to discount the prodigiousness of Tesla's accomplishments during the last five years. Revenue has soared at a compound average annualized growth rate of 103% during the past five years, propelled mainly by the company's Model S sedan, which has been lauded by numerous car magazines and rating agencies as one of the best vehicles ever made. Sales of the vehicle have subsequently soared, ranking its deliveries at the top in the U.S. and Europe among comparably priced sedans. Now, its late-2015 launched Model X deliveries are climbing quickly, looking poised to soon rival Model S.
Model X production at Tesla's factory in Fremont, California. Image source: The Motley Fool.
As long as Tesla can continue to grow at a blistering pace (and the company's recent ability to increase deliveries at accelerating growth rates provides promising evidence that size won't slow down expansion), the company looks poised to continue distancing itself from competition's early efforts in the long-range electric vehicle space.
Further, Tesla's $35,000 Model 3, which is slated to begin delivering to customers late next year, has previewed immense market opportunity ahead. Within about a month and a half of the Model 3's unveiling earlier this year, Tesla had garnered about 373,000 deposit-backed reservations for the vehicle.
If early interest in Model 3 is indicative of the market opportunity in this nascent space as Tesla brings more affordable models to market, Tesla shareholders may be positioned to benefit from a major industry transition.
Ultimately, a close look at a few bear and bull arguments for Tesla stock reveals promising opportunity, but also a high level of risk. While the majority of polled Foolish Twitter followers think Tesla stock is a buy, investors should tread carefully, keeping in mind the risks of investing in a company betting so heavily on a new technology in a capital-intensive industry.
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Daniel Sparks owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.