What Investors Keep Missing About Tesla Stock

Tesla stockTake a Closer Look at TSLA Stock

If I asked you to describe Tesla Inc (NASDAQ:TSLA), what would you say? Most people would give the stock answer; that Tesla is a maker of electric cars. It would appear they have good reason to say so, too.

Yahoo! Finance classifies Tesla under “Major – Auto Manufacturers.” And Google Finance lists Daimler AG (OTCMKTS:DDAIY), Ford Motor Company (NYSE:F), and General Motors Company (NYSE:GM) as Tesla’s main competitors. Not a single solar energy firm makes the list.

I find this odd.

Less than a year has passed since Tesla acquired SolarCity Corp (NASDAQ:SCTY). The $2.6-billion deal made Tesla one of the leading solar providers in North America, so why are we still pretending that TSLA stock is a pure-play on vehicles?

Notice that the company is no longer called “Tesla Motors Inc,” but simply “Tesla Inc.”

Elon Musk dropped the “Motors” after he bought SolarCity. There was no need to continue with the charade now that he finally had what he always wanted.

Read his original “Master Plan” if you think I’m exaggerating. His intentions are right there, hiding in plain sight.

The overarching purpose of Tesla Motors…is to help expedite the move…towards a solar electric economy.

(Source: “The Secret Tesla Motors Master Plan (just between you and me),” Tesla Inc, August 2, 2006.)

Later in the letter, Musk says that Tesla will be partnering with SolarCity, a company established by his cousins and funded by himself, in order to execute this vision. He actually wrote that.

So it’s obvious that Tesla is not (just) a car company. It’s also clear that investors are not thinking much about Tesla’s energy ambitions. But what do we do with this information?

Trade on Other People’s Mistakes

I’m ecstatic that people think Tesla is a car company and nothing more. It is music to my ears.

Why? Because it means they are only measuring Tesla, and by extension, TSLA stock, against other automakers. That is like trying to calculate an elephant’s weight using a ruler.

It’s the wrong tool.

Let me give you an example of how this mental error can lead you to undervalue TSLA stock.

You remember the “Gigafactory,” right? Tesla’s monstrous facility in the Nevada desert that is supposed to churn out batteries faster than you can read this article?

TSLA stock rose 85.82% since the Gigafactory came online, in part because investors perceived it as a positive step for the company.

TSLA stock chart

Chart courtesy of StockCharts.com

Investors (rightly) assumed that Tesla was building the facility to slash its overall production costs. They understood that producing the batteries en masse and independently was a clever ploy to widen Tesla’s margins.

The factory would also help Tesla meet the rising demand for electric cars and tighten its supply chain. In other words, there were plenty of reasons to be bullish about the factory, and investors were smart enough to see them.

And yet, for some reason, investors aren’t as bullish on the Gigafactory 2.0, which happens to produce solar panels instead of batteries. Why don’t the same reasons apply? (Source: “Tesla starts mass production of new ‘2170’ battery cell at the Gigafactory, will be used in Model 3 in Q2,” Electrek, January 4, 2017.)

Here’s a quote about the Gigafactory that appeared in dozens of editorials hyping its importance to the TSLA stock price. (Emphasis added.)

Our cost of battery cells will significantly decline due to increasing automation and…the simple optimization of locating most manufacturing processes under one roof, and economies of scale.

(Source: Ibid.)

The funny thing is that you could substitute the words “solar panels” for “battery cells” and this quote would still make sense. It would just apply to the Gigafactory 2.0 instead of the Gigafactory 1.0.

There’s no reason that one should have a bigger impact on Tesla’s income statement, and yet the reactions are a world apart. It smells like a mistake to me.

Investors are underweighting the importance of Tesla’s solar business, and for no other reason than the fact that Tesla branded its car business really well. I remain quite bullish on Tesla stock because of this mistake, and frankly so should investors.