Last year, TD Ameritrade named the most popular stocks among four different generations of investors. Millennials were the only generation to have Tesla Motors Inc (NASDAQ:TSLA) among their 10 most widely held stocks.
Regardless of how you feel about TSLA stock, here’s what many Millennials may be missing.
TSLA Stock Has a Steep Hill to Climb
Any time I write anything bearish about TSLA stock, the TSLA bulls love to talk about how electric, driverless cars are the future and Elon Musk is a great visionary.
I agree with both those points. I do. The problem is not Musk or the product. Tesla stock has three major hurdles to overcome in the next decade or so. First, TSLA has the task of disrupting a well-established auto industry that dwarfs it in size. TSLA sold about 50,000 vehicles last year. General Motors Company (NYSE:GM) sold 9.9 million.
And that brings us to the second problem, which is TSLA’s valuation.
Assuming the company can take a significant chunk of the global auto market, there doesn’t seem to be much upside for the stock. Tesla’s market cap is already roughly two-thirds that of GM. The stock is priced as if it has already succeeded when it has barely even begun.
Finally, the most troubling hurdle of all for TSLA is its aggressive spending and huge debt levels.
Back in 1968, NYU Stern Finance Professor Edward Altman developed a metric for determining the credit risk of public companies called the Altman Z-score. The formula for calculating the Altman Z-score takes into account working capital, total assets, retained earnings, EBIT, equity value, total liabilities and sales. Altman determined that a score below 1.8 meant a company had a high likelihood of bankruptcy.
The chart below shows the Altman Z-scores of a number of widely held stocks. The group includes blue chips like The Coca-Cola Co (NYSE:KO), growth stocks like Netflix, Inc. (NASDAQ:NFLX) and tech giants like Apple Inc. (NASDAQ:AAPL).
As you can see, TSLA stock has by far the lowest Altman Z-score of the companies included at 1.9.
But while Tesla currently remains above the 1.8 Altman bankruptcy threshold, it might not stay there for long. TSLA recently agreed to a buyout of SolarCity Corp (NASDAQ:SCTY). SCTY stock has more than $3.3 billion in debt and burned through $380 million in the most recent quarter. The company’s standalone Altman Z-score is a staggering -0.3.
Once the buyout deal is official, Tesla’s Altman Z-score will likely be dragged significantly lower than 1.9.
Speculation in Moderation
At the end of the day, TSLA stock is…
Click here to continue reading
Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!
