Betting on TSLA Stock
The most convincing argument against Tesla Motors Inc (NASDAQ:TSLA) is that it makes no money. Critics say TSLA stock is dramatically overvalued considering its earnings are negative. It is a powerful argument.
But it also happens to be irrelevant.
Tesla could be profitable as early as the fourth quarter of 2016. The company’s business model is designed to keep its bottom-line growth on a steep upward curve, but the TSLA stock bears don’t want you to know that.
They want you to ignore an essential truth of investing: past results don’t tell you anything about future performance.
I’ve been alive my whole life, but I don’t take that as a guarantee I’ll be here tomorrow. A bus could hit me on the way home from work and that would be a departure from my past performance. I would then be the opposite of alive; I would be dead.
Knowing that I’d been alive for a couple of decades wouldn’t have helped me predict that. But if you knew things about my route home, whether I was drowsy or maybe had headphones on, you could start to make a more accurate model.
Past results don’t dictate future performance.
Tesla isn’t making a net loss by accident and anyone who tells you it is is either stupid or disingenuous. The company has a master plan that I call—you guessed it, “Tesla’s Master Plan,” or the “TMP.”
The TMP is fairly simple. It is based on a principle from Econ 101 known as “economies of scale.” It’s the idea that products become cheaper to manufacture when you make more of them. The most cash-rich companies are usually operating at economies of scale.
Armed with this basic law of economics, Tesla released its most expensive car first. The higher cost of making that vehicle was offset by the higher margins. But as Tesla increased its manufacturing capacity, it could afford to build a less expensive car.
Think about that: only by having the ability to make more cars can Tesla afford to produce lower-priced vehicles. And that’s exactly what has been happening.
In the final quarter of 2015, Tesla shipped 76% more “Model S” units than the same period a year before. (Source: “Tesla Fourth Quarter & Full Year 2015 Update,” Tesla Motors Inc, February 10, 2016.) It was the best-selling full-size luxury sedan in the United States.
Three months later, on March 31, the company unveiled a $35,000 car: the “Model 3.”
Tesla’s affordable sedan only became available to consumers when the firm approached scale in the luxury segment. It is working its way down the price ladder, building up its capacity along the way.
There were 400,000 preorders for the Model 3. To put that into perspective, consider that Tesla has only delivered 107,000 Model S units since 2012. (Source: Ibid.) The jump in production is going to be huge.
So for all you cynics out there, there’s no secret as to why Tesla can achieve profitability this year. It is scaling up production at a rapid pace, meaning the high valuation of TSLA stock is completely justified.