Conversation about Tesla (NASDAQ:TSLA) is everywhere right now. The electric car company has been making headlines recently not only for their plan to build the world’s largest lithium-ion battery factory, but also for the new Arizona bill that would allow the company to sell cars and bypass dealers, a win in its ongoing battle in other states against dealer licensing regulations. It recently lost this same battle in New Jersey. With controversy and speculation about Tesla rampant in the news, I wanted to learn what some of the best investors in the world have to say about the current and future state of the company.
Eugene Groysman, our resident Apple expert at Marketocracy, is also an advocate for Tesla, calling it the “Apple of the automotive industry." Eugene has grown his initially small position in Tesla to about 6% of his current portfolio, buying more shares recently when the stock price was falling. His confidence in Tesla is rooted in his belief that Tesla has the disruptive quality of the “Model T” in the electric car industry—a game changer—and this X-factor will allow them to succeed where other electric car manufacturers have failed in the past.
You can view Eugene's top 5 holdings, learn more about his strategy, and track his progress with monthly Performance Insights.
Ken Kam: Eugene, what spurred your interest in looking at Tesla for your portfolio?
Eugene Groysman: I live in the small market town of Milwaukee. When the Tesla car started showing up around Milwaukee, it caught my attention. This is not Chicago or New York. If Tesla has made its way here, you know that the car is becoming more cost effective. I’m a firm believer that new technologies have to become cost effective before they can break barriers and disrupt an industry.
Ken Kam: So you would say that Tesla is breaking barriers? What do you think they’ve accomplished that is making this happen?
Eugene Groysman: I just see them breaking through the threshold that has held other companies back. Both Nissan and Toyota have electric cars, but they just supplement the existing models. Tesla has fully taken on this market; all they produce are electric cars. I’ve been to the Tesla showroom to take a look at the Model S, and it’s a very compelling car, especially as they continue to lengthen the miles per charge.
Ken Kam: What does Tesla need to do to double its market cap?
Eugene Groysman: The battery and the charger are the key components that need to see improvements in order to truly make the car cost effective and efficient for the average person to buy. The battery must last longer, and the charge must happen quickly so that it can compete with regular filling stations. A five minute charge would place them squarely in competition with non-electric cars and disrupt the entire auto industry.
Ken Kam: What is Tesla doing to reduce the time it takes to recharge the car?
Eugene Groysman: Tesla is planning to build high powered charging stations across the country that will charge your car in 30 minutes. That’s still quite a bit longer than it takes to fill up a car with gas. They need to reduce the charging time to the point that it will be a 1:1 comparison to the non-electric models.
Ken Kam: What else is Tesla doing to make the car cost-effective?
Eugene Groysman: They are looking to build the world’s largest lithium-ion battery factory right now, which they anticipate will eventually drive down the per kWh cost of the battery pack by more than 30 percent. They are also trying to reduce costs by eliminating the middle man -- the car dealers -- but this has met with fierce political opposition in some states.
Ken Kam: So in order to disrupt the auto industry, Tesla has to create a nationwide system of charging stations, build the world’s largest lithium-ion battery factory, and overcome strong political opposition in many states. None of that sounds easy! Why do you think Tesla is the “Apple” of the automotive industry?
Eugene Groysman: Just like Apple, Tesla has an opportunity to revolutionize a market. With Apple it was the unique products of the iPod and iPhone that revolutionized the digital music and mobile phone markets.
At the moment, the steps Tesla is taking look expensive and risky, but when they deliver a cost-efficient car I foresee an explosion in sales growth. At that point, the charging stations and battery factory will be seen as a huge barrier preventing today’s automotive leaders from being competitive.
Tesla does not have all the answers at the moment. But if investors wait until all the questions have been answered, it will be too late to invest in the stock. At this point, investing in Tesla requires having faith that Elon Musk can provide the same kind of focused, effective leadership that Steve Jobs provided for Apple.
I think Elon Musk is up to the task because I see Tesla funneling all their resources into revolutionizing the automotive industry and providing a legitimate alternative to the monopoly that is the gas-powered car.
Ken Kam: So what are your predictions for the stock?
Eugene Groysman: I believe that the stock price will be volatile but continue to go up as long as Tesla continues making progress towards making a cost-effective electric car. When they succeed, we may see the same kind of stock price movement as when Apple (NASDAQ:AAPL) introduced the iPad. Those who missed Apple should pay attention to Tesla. These kinds of opportunities are rare for investors.
When you compare Tesla’s market cap of $27 billion with Ford’s (NYSE:F) market cap of $100 billion, and GM’s (NYSE:GM) of $54 billion, it is easy to see that Tesla could double when their car becomes cost-effective. And, if it turns out you have to cut out the dealers to make the car cost-effective, Ford and GM are either going to have to cut out their dealers (a very tough discussion) or compete with a significant cost disadvantage. If Tesla also owns the battery technology that reduces the recharge time to five minutes, Ford and GM will be at an overwhelming disadvantage that will last for many years.
Ken Kam: Thank you Eugene!
Part 2 of this article, draws on the collective knowledge of some of our other high-performing members and share their insights and feedback on how they think the stock is doing and what their recommendations are.
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Eugene runs a core portfolio for our clients in which he uses fundamental analysis to find companies in every sector that offer above average risk/reward profiles. From May 9, 2003 through the end of 2013 his model portfolio has averaged 18.7% a year while the S&P 500 has averaged only 8.8%. Clients in our SMA program at Marketocracy own these stocks because they have allocated a portion of their account to Eugene’s model portfolio. Visit our website for more information about Eugene Groysman.
The opinions expressed in these articles are general in nature and not specific to your financial situation. To discuss your financial objectives, first connect with Ken Kam on LinkedIN.
Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
