Here's why Tesla is the riskiest stock in history (TSLA)

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If you don't dine on risk for breakfast, lunch, dinner, and your midnight snack, Tesla isn't a stock for you.

Stay hydrated, Elon. play

Stay hydrated, Elon.

(AP Photo/Francois Mori))
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Tesla shares enjoyed a massive rally at the beginning of 2017 but are now in full-on pullback mode, sliding 11% in the past month and dropping another 4% in early trading on Tuesday, after starting the with a similar plunge.

This is nothing new. Tesla is a volatile stock and investors are accustomed to both big spikes and swoons, as well as plenty of short bets on the company's inflated valuations. CEO Elon Musk has even at times called shares overvalued.

Tesla has copiously rewarded true believers. In 2010, when the carmaker had just recovered from a brush with bankruptcy and was still selling its first vehicle, the original Roadster, you could have bought in for less than $20 a share. So even the recent drop from $280 to $245 isn't going to faze long-term investors. In fact, depending on their holdings, some of them might be taking some well-deserved profits at this point.

On a Tesla chart, the highs are very high, and the lows are quite low relative to those highs. The company sheds billions in its market cap without batting an eye. For seasoned investors, there is something of a pattern — the trick seems to be buying on the titanic dips and holding on during the sinking phase, waiting for the inevitable bonkers recovery.

If you don't dine on risk for breakfast, lunch, dinner, and your midnight snack, Tesla isn't a stock for you. It's also extremely difficult to figure out which way Tesla is going to move based on information. At its core, Tesla is an automaker, and although it sells electric cars and is therefore fundamentally different from other car companies, it also doesn't make many cars and has not yet translated an enviable 20% gross margin into consistent profits.

Never stop risking

It's been a wild ride for investors. play

It's been a wild ride for investors.

(Markets Insider)

Tesla also never consolidates. Rather than taking a breather and becoming a two-model automaker — with both models, the Model S sedan and the Model X SUV, selling for around $100,000 — and bolstering its market position, Tesla dived into what will be a multibillion-dollar effort to launch the high-volume $35,000 Model 3 later this year.

This undertaking doesn't have much to do with market fundamentals. Amazon could lose money for years — and does — on the assumption that expanding would lead to market dominance. But Tesla doesn't stand much of a chance at knocking off the traditional auto industry, which for the past two years in the US alone has sold well over 30 million vehicles.

Tesla could quadruple sales, and the carmaker would still move as many vehicles in total as Honda moves of just its CR-V SUV in a single year.

Rather, the Model 3 is all about realizing Musk's vision of accelerating humanity's departure from the fossil-fuel era. With ambition like that, you can't get too hung up on profits.

It should be apparent, then, that Tesla doesn't much care what its stock price is. The issues come up only when it's necessary to raise more capital, and for that, a $200-plus price is helpful. To a degree, Tesla sees Wall Street as a giant ATM, but that's just the way the company does business. If the money is there, it would be stupid to not take it.

Complexity is key

Tesla's massive Gigafactory. play

Tesla's massive Gigafactory.

(YouTube/Matthew Roberts)

Tesla also doesn't seek to reduce its exposure to business complexity. In the past three years, it's plunged into the production of the Model X and Model 3, started a separate energy storage business, expanded its Supercharger fast-charging network, pushed the envelope on self-driving technology, opened a gigantic battery factory in Nevada, and merged with SolarCity, to the tune of $2.1 billion and a few billion more in acquired debt.

Every analyst on Wall Street is currently trying to figure out how to value the new Tesla conglomerate, with widely varying results.

Spend some time dealing with all this and you rapidly come to the conclusion that assessing Tesla is like trying to understand a gigantic experimental novel that's still being written. Most of the company's billions in market cap are parked in the future, and numerous events have to take place for those billions to become real money. To it's credit, Tesla has been able to make some stuff happen. But it typically runs over-schedule. When this periodically dawns on Wall Street, investors start to discount the stock, as they are now amid a big discussion about whether the Model 3 will get to volume production by mid-2018.

Meanwhile, Tesla moves relentlessly forward. To be honest, if the company is right about everything, the stock could be enormously more valuable tomorrow than it is today. If it's right about just a few things, such as electric cars and solar roofs, then its price spikes could be justified.

But with all this comes the production of risk — in fact, you could now argue, with the daring acquisition of SolarCity, that Tesla has more than doubled down on risk creation. Risk is job number one at the company. There are other risky investments out there. But with Tesla, the risk just keeps on coming, as it always has.

Yes, it's exhausting. But that's what you get when you try to figure out the riskiest company in history.