It makes sense for stock investors to pour their hard-earned cash into Tesla to capitalize on its accomplishments. The company has been regarded for promoting the use of electric vehicles and advancing energy storage technologies. But investing in Tesla stock can be a wild ride. It has figured into several controversies in the past, including bold and contentious statements from Elon Musk, its chief executive, and its high levels of debt and cash burn rate. This article explores the pros and cons or advantages and disadvantages of investing in the stock of this reputable albeit controversial company.
Electric Dreams or Risky Business: A Look at the Advantages and Disadvantages of Investing in Tesla
Pros: Advantages of Tesla Stock
Tesla is both an automotive manufacturer and a provider of clean energy solutions to include energy storage devices and solar panels. It is one of the most valuable companies in the world, as has remained the most valuable automaker in the world. It is also one of the largest suppliers of lithium-ion batteries. The market potential of electric vehicles and the ongoing trend as regards clean energy solutions at the residential and commercial levels provide the best reasons to invest in Tesla stock. The following are the specific advantages:
• Growth Potential: Tesla stock is both a growth stock and a tech stock. Its stock price averaged $17.00 per share in 2010 and had grown to more than 1000 percent or around $200.00 per share in 2022. This exponential growth comes from heightened demand for electric vehicles and clean energy solutions.
• Affordable Stock: Another advantage of investing in Tesla stock is its historical stock splitting. A stock split involves increasing the number of outstanding shares by issuing additional shares to existing shareholders based on a specified ratio. Splitting does not change the market capitalization of a company but makes its stock more affordable.
• Market Disruption: It is also a market disruptor and has the potential to further disrupt existing markets. The company has made electric vehicles a viable alternative to traditional vehicles running on an internal combustion engine. It has also been aggressive in advancing further its energy storage technologies.
• Strong Leadership: Musk is a controversial and polarizing public figure but it cannot be denied that he has an established business background. He was behind the online payment processor PayPal and was also responsible for commercializing space transportation and satellite internet connectivity through SpaceX.
• Other Advantages: Tesla is also known for its competitive advantages. This includes brand recognition, technological innovation, a first-mover advantage in the electric vehicle market, and a diversified business model that revolves around automaking and clean energy on top of a close product ecosystem.
Cons: Disadvantages of investing in Tesla Stock
Investing in the stock market has notable risks. Some of these risks are more pronounced in a particular company or specific types of stocks. Investing in Tesla stock comes with risks that are both inherent in stocks and unique to the company. The company has experienced several setbacks stemming from internal and external factors. It also experiences problems inherent to its value chain. The past performance of its stock also does not guarantee favorable results in the future. The following are the specific disadvantages:
• Price Volatility: Remember that one of the advantages of Tesla stock is its impressive price growth. However, as mentioned, previous performance is not an absolute indicator of future performance. Its stock price experiences short-term fluctuations, thus making it unideal for short-term investors and traders.
• High Beta: The beta of a stock is a good indicator of its volatility. Tesla has repeatedly experienced a beta greater than 1. Note that a beta of 1 indicates that the stock price will move with the market while a beta of less than 1 means that the stock is less volatile than the market. A beta greater than 1 indicates high price volatility.
• Cyclical Stock: Remember that Tesla is considered a growth stock due to its past historical performance. However, considering the fact that it falls under the consumer discretionary sector, it is also a cyclical stock and as such, its performance is tied to the boom and bust cycle of the economy.
• Production Issues: Another disadvantage of investing in Tesla stock centers on uncertainties that come from the capacity of the company to keep up with demands. Its entire production depends on several factors such as the availability of raw materials for its batteries and large-scale supply chain disruption.
• Other Threats: The company competes with other electric vehicle manufacturers including established ones such as Toyota and emerging companies from China and India. Electric vehicles still compete with hybrid and fuel-fired automotive vehicles. Low fuel price slows down electric vehicle adaption.
• Profitability Issues: Production issues such as shortages and supply chain disruptions and other threats such as threats from competition and substitutes, fuel price, and electric vehicle demand mean that the profitability of Tesla is dependent on how well it will be able to manage or reduce these seeming inherent problems.