Pegged by many as a high-risk, high-reward stock, Tesla Motors, Inc. (TSLA) ranks among the most interesting public companies in the world. Founder Elon Musk is a controversial superstar in the technology industry, and Tesla's Silicon Valley roots have boosted investor expectations. Tesla attracted even more attention in 2021 when the company reached a trillion-dollar market cap–a stratospheric valuation that had only been reached by a handful of megatitans.

The future of Tesla has exciting potential but remains difficult to predict. TSLA investors should temper their expectations and consider how the potential risks that Tesla may face over the next five to ten years.

Key Takeaways

The electric vehicle (EV) maker, Tesla, has a number of key risks that it will face in the next 5-10 years.
Notable risks include Tesla cars being too expensive with tax breaks and that the construction of its Gigafactory (battery factory) taking longer than expected.
More broadly speaking, Tesla faces a competitive environment from both legacy automakers and other EV manufacturers.
Tesla's future success will depend heavily on ramping up manufacturing capacity and infrastructure.
The Tesla brand is closely associated with Elon Musk, a CEO whose visionary ambitions are matched by his propensity for scandal.

1. Tesla Cars Are Still Too Expensive

Even with generous government incentives, such as tax breaks for alternative technology, potential consumers of Tesla's Model S are still faced with a large price tag that starts at $94,990 before any incentives or discounts, as of November 2021. Even Tesla's new lower-cost option, Model 3, is $43,990 before tax incentives and gas savings, as of May 2021—which is still out of reach for most drivers.

The cars are not only expensive for consumers to purchase, but they're also costly for Tesla to make. Vertical Group analyst Gordon Johnson estimated that the company lost roughly $14,000 on each of the Model 3 vehicles it sold in 2018, although these figures may improve as the company scales up.

2. Tesla Could Run Out of Batteries

One of the early problems Tesla executives ran into was a lack of batteries to power their products. Tesla's world-renowned Gigafactory, which is still under construction in Sparks, Nev., is supposed to solve the company's battery crisis. The lithium-ion manufacturing plant, with a planned footprint of more than 1.9 million square feet, projects to help ramp production to more than 500,000 Tesla cars annually.

Major projects such as the Gigafactory are often plagued with logistical or regulatory hurdles, and it remains to be seen if the factory can be completed on time. The Nevada government has given the green light to the Gigafactory, which is expected to produce $100 billion in additional economic activity over the subsequent decades.

Although the facility is only 30% complete, one gigafactory may not be enough, and Musk has hinted that the company may need several such facilities to meet demand. It is going to take an incredible amount of capital expenditures (CapEx) to keep the company fully charged and shareholders happy.

Tesla was the largest manufacturer of plug-in electric vehicles, with 14.55% of all worldwide sales in the first half of 2021. The next largest manufacturer was VW Group, with 12.52%.

3. Low Gas Prices

When gas prices tumbled in 2014 and 2015, Tesla lost some of its luster. After all, gasoline-powered cars compete with Tesla's products, and declining gas prices make gasoline-powered cars more economically attractive. Gas prices do not have to remain at decade lows to damage TSLA stock prices; it just has to be cheap enough to keep legacy cars on the road.

TSLA's gas quandary comes from two angles at once. The first problem is increased global production in oil; the once-dominant "peak oil" theory seems to be debunked, with global oil production increasing every year from 2009 through 2019. Oil companies are getting better at finding oil and, with the help of hydraulic fracturing and horizontal drilling, they are also more effective at extracting oil.

Petroleum supplies are increasing and, at the same time, internal combustion engines are more fuel-efficient. According to the Bureau of Transportation Statistics, the average fuel efficiency of light-duty passenger cars in the U.S. continues to improve.

If Tesla is going to transition into a mainstream auto manufacturer and generate consistent cash flow, it needs to sell a lot more cars. Consumers are less likely to transition to electric cars if petroleum-based fuels remain a far cheaper alternative.

4. Increased Electric Vehicle Competition

Tesla is not the first company to create electric cars. Interestingly, the first electric automobiles were probably created as early as 1834 by Thomas Davenport, but Tesla seems to be the most successful, thus far.

Two notable competitors, the Chevrolet Bolt and the Nissan Leaf, failed to gain early traction because of high retail prices and limited driving range. The Nissan Leaf starts at $27,400 before incentives, with a range of up to 226 miles, as of October 2021.

The 2022 model of the Chevrolet Bolt, starting at $31,000 before incentives, with a range of 259 miles, offers more than the 220-mile range of Tesla's standard Model 3, as of October of 2021. Other companies plan to enter the electric car market in the next few years, including Mercedes-Benz, Volkswagen, Subaru, Ford, and BMW. If this happens, then Tesla's market share may start to get crowded.

Some tech companies may also join the fray; Apple, Inc. believes it can challenge Tesla in the transportation industry, and Google has also placed bets on the auto industry. Tesla is admittedly concerned about businesses with broader existing consumer bases.

5. Tesla May Never Recoup Massive Expenditures

Musk once famously noted about his company, "We are going to spend staggering amounts of money on CapEx." Lots of investors like to see high capital expenditures, but there has to be a payoff on the other end. This seems particularly true in an infant industry paved with failed startups.

Tesla has already spent billions on development for the Model 3 and Model X cars, and the battery factory comes with its own hefty price tag. In an SEC filing for the first quarter of 2021, Tesla estimated that capital expenditures would likely ramp up to $4.5 or even $6 billion per year.

$6 Billion

According to SEC filings, Tesla may spend as much as six billion per year on capital expenditures in the coming years.

6. A Controversial, Part-Time CEO

The same quarterly filing included a note about Tesla's reliance on Elon Musk. Tesla is "highly dependent on the services of Elon Musk, Technoking of Tesla and our Chief Executive Officer," the company said.

This is not particularly shocking, especially in the technology sector; think of Steve Jobs and Apple. Perhaps more concerning is what follows shortly after: "he does not devote his full time and attention to Tesla."

Musk is a very active executive. He was once CEO of PayPal before joining Tesla and has since become CEO and Chief Technical Officer (CTO) of Space Exploration Technologies. He is also Chair of SolarCity, which installs expensive solar equipment. The loss of a key executive could be a substantial setback for the company.

Moreover, the eccentric CEO has proved a lightning rod for scandal, as might be expected from a self-appointed "Technoking." The same quarterly filing notes that there are now nine pending class-action lawsuits against Tesla and Musk, relating to a 2018 tweet in which Musk falsely announced plans to take the company private. The tweet is alleged to have been an effort to manipulate TSLA's share price, a violation of federal securities laws.

Musk's impulsive behavior also has real-world consequences. During the COVID-19 pandemic, Musk repeatedly aired misinformation about the pandemic and criticized lockdown restrictions as "fascist" in an earnings call with Tesla investors. He later defied public health authorities by reopening Tesla's Bay Area plant, causing a cluster of 450 infections.

The Bottom Line

With a trillion-dollar valuation, Tesla's success as an electric vehicle manufacturer is hard to dispute. However, there are still many potential hurdles to overcome, from the difficulty of developing affordable EV technology to the risks posed by competing firms.

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