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Tesla investors need a 'bipolar outlook' on the stock, analyst says

  • Tesla will either be a big success or get "competed away," according to Jim McCaughan, CEO of Principal Global Investors.
  • Tesla is looking to raise $1.5 billion through a high-yield junk bond offering to give it the funds to ramp up production of its mass market Model 3 car.
  • McCaughan said holding Tesla bonds is "risky".

Tesla is either going to be a big success or get "competed away" so investors need to have a "bipolar outlook" on the stock, according to one analyst.

Jim McCaughan, CEO of Principal Global Investors, said that the majority of the market thinks Tesla will be a big success but it's not so black and white.

"The thing with Tesla is it's either going to be a dominant force in its industry or it's going to somehow get competed away. And if you're looking at it as a stock, you need to have a very … bipolar outlook," McCaughan told CNBC in a TV interview on Tuesday.

Tesla is looking to raise $1.5 billion through a high-yield junk bond offering to give it the funds to ramp up production of its mass market Model 3 car. McCaughan said that the majority of the market thinks Tesla will be a success, but intense competition in the auto market could make it risky to hold bonds in the company.

"The market is obviously going for the big one, the big success. I would argue that from a bondholder point of view it's actually still quite risky because there are pretty big guns with a lot of resources, from Mercedes, BMW, GM, coming into that," McCaughan said.

Rating agency Standard & Poor's reaffirmed its negative outlook for Tesla and assigned a "B-" rating for the bond issue, which marks it as junk credit.

"We could lower our ratings on Tesla if execution issues related to the Model 3 launch later this year or the ongoing expansion of its Models S and X production lead to significant cost overruns," S&P said in a statement.

Initial production of the Model 3, which starts at $35,000, began in July and is the main focus for the company as it looks to meet the demand for the vehicle.

Analysts are split on their views on the stock. There are four strong buy and four buy ratings on the stock, with eight holds and six sells. The mean price target for the stock is $313.24, representing a 12 percent fall from current levels.