Risk It to Get the Biscuit: The Dangers and Rewards of Tesla’s Stock Volatility

By Maxwell Levine

On June 26, 2010, Tesla Motors (“Tesla”) became the first American automaker to go public since Ford in 1956. On its first day trading on the market, Tesla’s share price rose from $17 to $23.89, an impressive 41% surge. Even more surprising, from March 4, 2013 to September 4, 2014, Tesla’s stock exploded from $35.58 to $286.04, a 703.9% increase in merely 18 months!

No one benefited more from Tesla’s stock boom than Tesla’s CEO Elon Musk, who had the foresight to forgo a large annual salary in exchange for stock options. Musk’s 35,001,294 shares are currently valued at $7.16 billion and comprise approximately 27% of the company’s total outstanding shares. Despite Musk hitting the jackpot with his Tesla shares, potential investors should proceed with caution before investing.

As a publicly traded company, Tesla has never posted a profit, nor are they forecasted to until 2017. Musk himself stated in October 2013 that “[t]he stock price that we have is more than we have any right to deserve” as shares were trading at nearly 100 times the 2014 earning estimates.

Other than overvaluation, investors must consider how fast and severe the stock price would drop if Musk decides it is time to cash out and begins selling off massive chunks of his position. Although Musk has stated that “I will be the last one to sell shares,” Musk is a true entrepreneur and it would be in his character to seek out innovative ventures with substantial financial needs to invest in. In addition to Tesla, Musk is currently the CEO of SpaceX, a company that builds rocket ships that take astronauts and cargo to space, and has expressed a keen interest in constructing a sci-fi-like vacuum-tube network system he refers to as “The Hyperloop”.

Additionally, Tesla has invested $5 billion dollars in building its lithium battery pack manufacturing facility in Nevada known as “The Gigafactory,” which promises to reduce the costs of battery production by 30%. While the company’s commitment to growth is both obvious and necessary, it does not provide any value to short term investors.

Those considering investing in Tesla, should only do so if they are willing and able to hold their position for at least 2 to 3 years. While the uncertainties surrounding Tesla’s valuation are legitimate, those who have the patience and means to tolerate the risks now are putting themselves in a position to potentially realize astronomical returns on their investment in the long run.