Despite Tesla’s (NASDAQ: TSLA) legions of supporters, including the hundreds of thousands who reserved a Model III sedan, there is also a growing faction of naysayers that consider Elon Musk’s enterprise a house of cards on the brink of collapsing. While I would not go quite this far, there are definitely some red flags emerging for Tesla investors as of late, especially given that news of the company missing Model III production by a wide margin has begun to emerge in recent headlines. Notably, however, this has done very little to uproot the stock from its current valuation of around $355 per share, yet it could definitely lead to some serious volatility in Tesla’s future.


Naysayers need only look to Tesla’s P/S ratio in relation to it’s competitors as a means of proving the company’s blatant over-valuation.Tesla stock currently trades at around six times sales, yet by comparison, Ford Motor Company (NYSE: F) trades at just 1.5 times sales and General Motors Company (NYSE: GM), which currently hovers at yearly highs, likewise trades at 1.5 times book. Due to this, the production and sales of the Model III is integral to validating Tesla’s inflated stock price, as it is intended to finally show returns for a company that, as of right now, costs so much yet has produced so little.

Heavy demands to meet: Model III orders v Tesla’s shipments to date. Source: Business Insider.

As such, I propose that shareholders ought to take the worsening developments at Tesla more seriously. At the moment, the media is interpreting that Elon Musk’s tweets imply that Tesla is facing serious supply constraints, due to production scaling problems for the highly-anticipated Model III sedan. If this is indeed the case for the company, then the competitive moat Tesla has over its rivals in the auto-industry may begin to narrow very quickly. That is, Tesla’s first-to-market advantage has allowed the company many years of lead time to steal market share in the electric-vehicle domain, but this could alter in an instant if Tesla fails to meet its high production targets.


Ultimately, production delays should raise cause for concern for Tesla investors, as competitors are quickly snapping at the company’s heels. For instance, both Mercedes-Benz and BMW are wrestling with releasing a luxury-class electric vehicle that will compete effectively against Tesla’s current range. What’s more, both Ford and General Motors, two of Tesla’s biggest competitors in the US market, could catch up with Tesla if Model III production does not begin to pick up at a brisker pace. Ford’s CEO has spoken of plans to pivot the company’s cars away from fuel and toward electricity, and General Motors has hinted at restructuring its electric vehicle strategy in the near future.


Nevertheless, Musk’s enterprise is still by far the most valuable electric-vehicle maker in the world insofar that it is well ahead of the competition in terms of it’s advanced automotive technology, so much so that consumers have been reserving Model III orders by the masses. Yet the slow initial production for the affordable Model III should definitely unnerve Tesla investors, as the stock seems to remain valued with the assumption that Tesla will continue growing its market share while keeping competitors out, despite warnings of serious production delays ahead. The notion of Tesla continuing to maintain it’s market-share in the electric-vehicle domain is most certainly at risk until the company ramps up Model III production, so until then, it is advisable to tread carefully when considering Tesla stock.

For Now, Tread Carefully When Buying Tesla