Don’t Bet Against Tesla Motors Inc
Elon Musk is facing increased competition from the big automakers, not to mention well-funded Chinese startups, but there’s still hope for the company.
We often hear the bearish case for Tesla Motors Inc (NASDAQ:TSLA), so let’s review some of the company’s tailwinds instead. After all, it’s easy to forget that Tesla is a historic firm.
There hasn’t been a new American automaker in more than 80 years. The industry is simply too consolidated, too capital-intensive, and too specialized. Foreign automakers posed a threat to the dominance of GM and Ford, but nobody thought there was enough space for another domestic manufacturer. Tesla proved them wrong.
Better still, Tesla completely altered the direction of the car market. This may come as a shock, but electric power and driverless technology weren’t exactly priorities for the big automakers. They had no cause to disrupt business-as-usual, but Tesla did. Tesla was willing to break the mold.
Think about it: before Tesla’s “Model S,” the Toyota “Prius” was the best-known electric vehicle (EV) on the market. Anyone who knows anything about cars will tell you those two vehicles are worlds apart in terms of, well, everything. The Tesla Model S is miles ahead.
When Consumer Reports reviewed the car, it scored 103 out of 100. The car was so incredible that it quite literally shattered the publication’s measuring system.
Obviously, Tesla is a special company. It’s surviving in an industry that hasn’t seen a new entrant for 80-plus years and it makes quality vehicles.
However, some investors are dead set against TSLA stock. They turn a blind eye to the firm’s historic achievements and point out its shortcomings as an investment. Some of these criticisms even come from famous hedge fund managers like Jim Chanos, the renowned short seller.
Chanos has taken a huge short position on Tesla stock. How come?
The main argument put forth by guys like Chanos is this: investing is about finding the right stock at the right price, and TSLA is neither. There’s no point of finding a great company whose stock is overvalued, because your return on investment will be close to nothing.
Some people would argue that’s where Tesla’s stock currently is. They think it is overvalued.
Then there are the ultra-bearish investors who think Tesla is both a bad company and a bad investment. These folks tend to have a general vendetta against electric cars, Elon Musk, or both. I know some of them personally and it’s pretty fair to say they’ll never be fans of the company, no matter what it does. I don’t even try arguing with those folks anymore.
However, from time to time, I’ll argue with the former group—the ones that like Tesla the company, but not Tesla the stock. Here are three reasons I give them to reconsider:
- Model 3 Pre-Orders: Tesla’s entire business model is upside down. It made the most expensive car (the “Roadster”) in its line-up first, because that’s where it would get the thickest margins. Then Tesla went to the second-most expensive car (the Model S), and so on. The “Model 3” is supposed to be the firm’s mass-market model and when pre-orders were unveiled, the firm logged more than 400,000 orders. That’s quite a few people who were willing to cough up the $1,000 deposit fee. Once production is in full swing, Tesla is expected to be cash-positive.
- Battery Production: Some of you may have heard of the “Gigafactory,” a battery factory that Tesla built in the middle of the Nevada desert. When it is completed, it’ll be the largest building in existence. The Gigafactory will be able to churn out plenty of batteries for Tesla’s burgeoning supply of vehicles. Most importantly, the scale of production would make these batteries cost-effective. Tesla’s also going to sell its “Powerwall” and “Powerpack” batteries that help store energy collected through solar power. Analysts expect these initiatives to add a nice chunk of revenue to Tesla’s top line. (Source: “Tesla’s Quest to Build the Machine Behind the Machine,” Fortune, June 6, 2016.)
- Driverless Technology: The ability for a car to drive itself could change the world in profound ways. Imagine a taxi service with no taxi drivers, or a ride-share app that owns a fleet of self-driving cars. This future isn’t that far away and competition is already heating up. Tesla is one of the earliest competitors in this space because it has already uploaded some self-driving features to its Model S vehicles. Eventually, it could leverage this technology to boost profits, either by licensing out its software or starting a driverless taxi service. (Source: “Faraday Future Eyes Michigan for Self-Driving Car Tests,” Fortune, June 6, 2016.)
I know it sounds farfetched right now, but this is almost certainly what our future will look like. We are almost certainly going to see self-driving cars in the next five to 10 years. Tesla is a big part of that future, and although there are some valid concerns, I wouldn’t listen too closely to the bears.