Tesla Stock The auto industry is its own sector, and it’s difficult to know which companies will succeed in it. But investing in a company that’s just one of hundreds of firms in that industry can be risky.
While some investors see risk in investing in Tesla stock
because the company isn’t well-known, the risks are far outweighing the potential reward.
Every stock has its risks, and investing in a company like Tesla involves a number of those. That’s especially the case when it comes to investing in Tesla stock. The company has a small market cap and is one of the newest companies in the auto industry.
That means it’s still in the process of maturing and will have to pass many more tests. Investors looking to buy in now would be gambling that Tesla will succeed in the long run. Here are some of the biggest risks of investing in Tesla stock.
Tesla has a small market cap
One risk that comes with investing in Tesla stock is its small market cap. A company’s market cap is its total value, which is the share price multiplied by the number of shares outstanding. Tesla’s current market cap is $31.5 billion.
Tesla has a big valuation for a company with so few cars on the road, and investors would be taking a risk if they invested in Tesla stock at this time. If Tesla fails to grow its production capacity and sales numbers, then the stock will likely tank.
Investors are gambling that Tesla will succeed during an uncertain period when auto companies are struggling to compete with each other and other tech companies like Apple are getting into the business of manufacturing cars. The future of Tesla could be very promising or it could go terribly wrong, and it all depends on how well-received their new models are among consumers and whether they can keep up with global competition in terms of manufacturing, design, quality, and safety.
Tesla has a lot of debt
Tesla has a lot of debt, and the company is not generating enough cash to cover its current liabilities. In the third quarter of 2017, Tesla had a total debt of $9.7 billion. This means it would take Tesla more than five years to pay off its debts if it only made enough revenue in one year. Its interest coverage ratio for the same time period was -2.66x. This means that Tesla’s earnings before interest and taxes (EBIT) is 2.6 times lower than its interest expense.
One way that Tesla could reduce its risk would be by reducing the amount of debt it has on its books. Tesla needs to either pay off some of this debt or find new ways to make money fast so that it can avoid bankruptcy or other serious financial issues as a result of high levels of debt on its books.
Tesla has a history of losses
Tesla has a history of losses and is burning through cash. Tesla’s losses are continuing to grow, even as the company continues to post quarterly profits. In the third quarter of 2016 alone, Tesla lost $619 million.
The company is spending more than it’s taking in and is forced to use debt or equity markets to finance its operations. This means that investors are gambling on Tesla’s future success when they buy into the company. If Tesla doesn’t see an increase in sales, then those investors will continue seeing their money dwindle away.
Tesla is still unprofitable
Tesla’s lack of profitability is one of the biggest risks of investing in Tesla stock. The company has been making losses every year since 2008. Yet, it still manages to attract more capital from investors by giving them an opportunity to buy a piece of the company in an IPO. This is called a “risk-reward ratio,” where investors are taking the risk on a company that hasn’t paid off yet, but could offer a big reward if it does.
But Tesla has not had any earnings for years and has been burning through its cash reserves to keep going. If it doesn’t turn things around soon, then it may have no other option than to call bankruptcy or shut down altogether.
Investors need to be able to see how much money they will make back on their investment before they invest in Tesla stock, and that would be impossible because there are too many unknowns at this point.
The potential reward isn’t worth the risk when you consider how unprofitable Tesla is right now
Tesla faces competition from established automakers
The biggest risk of investing in Tesla stock is that the company faces competition from established automakers. Companies like General Motors and Toyota have been around for decades, and they have a lot more money than Tesla to spend on research and development. They also have better access to suppliers, which gives them a huge advantage over Tesla. But that doesn’t mean the challenge is impossible for Tesla. The company has already surpassed both GM and Ford in market cap, so it does show some promise.
Tesla will have to make a lot of future improvements to remain profitable
Tesla is successful now, but it will take a lot of improvements in the future to remain profitable. The company faces stiff competition from companies like BMW, Chevrolet, and Ford. Tesla has a $23 billion market cap while BMW’s market cap is $58.6 billion. Investors may be better off investing in an established company with a large market cap that already has a proven track record.
Tesla also lacks refining capacity and doesn’t have much experience with manufacturing cars en masse. If Tesla hopes to meet its goal of producing 500,000 cars per year by 2020, it will need more than what it currently has in place.
The company needs to perfect its self-driving car technology as well before rolling it out to the public.
Tesla has had a lot of success in the past, but investors should be aware of the risks that come with investing in Tesla. The company is small, with a small market cap. Tesla also has a lot of debt, and it’s still unprofitable. Tesla faces competition from established automakers, and will have to make a lot of future improvements to remain profitable. Investors should consider these risks before investing in Tesla, especially given the company’s history of losses.
Updated on April 13, 2022 : This story was published at an earlier date and has been updated with new information.