Here’s Why Tesla Stock is Undervalued
Tesla Motors, Inc. (NASDAQ:TSLA) is a company like few others. It’s a car company with an idealistic vision for the world, driven entirely by its enigmatic founder. Elon Musk built Tesla with both hands and even emptied his bank account into Tesla stock when the company was near bankruptcy. Tesla is his firm.
That kind of devotion to a firm is something you simply don’t see with hired CEOs. Sure, they want the firm to succeed and can work hard, but the business wasn’t a product of their imagination. Founder/CEOs are different.
There’s a special connection between founders and their companies; a bond that borders on obsession. Elon Musk has risked his fortune on big ventures like Tesla Motors, making him the poster-boy of founder/CEOs. What hired CEO would do that?
Besides the devotion of Elon Musk, TSLA stock has a few other things going for it. One is the obvious necessity of replacing cars powered by fossil fuels, but the other is product diversification.
Tesla is branching out into energy storage, a smart move to create new revenue streams.
Tesla Stock Will Dip Before the Surge
Remember that Tesla hasn’t actually made any money yet. The company is still operating at a loss, and that is unlikely to change for some time. Investors seem to oscillate between bullishness on Tesla’s prospects and bearishness on the time scale it will take.
Earlier this year, Elon Musk said that TSLA stockholders shouldn’t expect a profit until 2020. Obviously, shareholders didn’t take well to that news. (Source: Tesla won’t turn profitable until 2020: Musk, MarketWatch, January 14, 2015.)
Tesla stock fell 7.1% almost immediately, and the stock fell as low as $185.00 in the following months. It’s trading around $230.00 right now, demonstrating the bipolar attitude investors have on TSLA stock. They swing from optimism to pessimism in a heartbeat.
Chart courtesy of www.StockCharts.com
Another swing to the downside is virtually guaranteed. Tesla released their patents online because Elon Musk wants to encourage other car makers to step up their electric car manufacturing. He wants more competition.
If they follow his lead—and it appears they will—we’re going to see a wider selection of electric cars on the market. Tesla stockholders are going to turn bearish with every new competitor. And who can blame them?
At first glance, Elon Musk appears to be giving away Tesla’s advantage. But think about the broader challenges for adopting electric cars. Overcoming the stigma built up against the battery life and charging issues takes a lot of investment.
The perception of electric cars will change as more car companies start making them.
Elon Musk sees Tesla succeeding only if electric cars become mainstream. So he’s baiting other car makers to follow him, thereby enlisting their support to educate consumers on the benefits of electric cars.
This guy knows how to play three-dimensional chess.
TSLA Stock Depends on Product Diversification
Tesla stockholders are temperamental. They will likely lose faith one or two more times before the company’s profits start to climb. Case in point: TSLA stock was down nearly five percent at midday on Wednesday October 7th.
But that doesn’t mean the stock isn’t a buy. By changing the public’s view of electric cars, Tesla is prepping the market for its Model 3, which premieres in March 2016.
The Model 3 is Tesla’s first reasonably-priced car, starting at roughly $35,000. One of Elon Musk’s great insights for building an electric car company was to start at the top of the price ladder and work his way down. (Source: Confirmed: The $35,000 Tesla Model 3 Will Be Unveiled in March 2016, Popular Mechanics, September 3, 2015.)
The company has to operate at scale in order to make affordable cars. Without mass orders, the unit cost on a $35,000 electric car is absurdly high. By contrast, luxury items like the Tesla Roadster and the Model S have higher margins.
In any case, Tesla could start bringing in revenue from sources other than automobiles. Just recently, they unveiled a new product called the Powerwall, a slim battery pack to store energy generated by solar panels.
The batteries give an unprecedented level of energy freedom to individuals who want to adopt a sustainable lifestyle. Moreover, Powerwalls can be stacked to create a “Powerpack” for commercial users. (Source: Tesla Isn’t an Automaker. It’s a Battery Company, Wired, April 22, 2015.)
Businesses could also benefit from energy independence. The potential for immediate profit makes Tesla look more like an all-around energy company than just an electric car manufacturer.
When profits from the batteries start to roll in, and investors realize that Elon Musk played other car makers for a fool, they will double down on TSLA stock.