Last week, Eugene Groysman called Tesla the “Apple of the auto industry,” and made the case that in order to double its stock price, Tesla (NASDAQ:TSLA) 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. These are significant hurdles about which there is much disagreement.
When it comes to researching stocks, the opinions I value most highly come from those who have taken a position in the stock and have made money on it. After all, if the person expressing an opinion about the stock does not have a strong enough conviction to make a trade, why should we? And, if they have made trades on the stock, but have not made any money, where is the evidence that we should believe them?
We polled our investment research community to identify members who hold Tesla in their portfolios and asked them to share their insights with us. Of the comments I’ve received from our members about Tesla, three particular opinions stand out to me as worthy of note. These members have long-term track records with Marketocracy and a history of making money on the stock to validate their opinions.
Thomas Bethke has an eight-year track record at Marketocracy, which includes a gain of $488,000 on Tesla.
Tesla is revolutionizing a massive industry that just a few years ago seemed impervious to disruption due to heavily entrenched players, unions, dealers, suppliers, and established gas stations and energy sources. This revolution is a direct result from Elon Musk’s perfect execution of his strategic vision. Watching his plan unfold, it looks as though he created a list of the primary criticisms of electric cars (range anxiety, performance, cost, feasibility, etc.), combined it with the worst aspects of automobile ownership (car salesmen, safety, service, technology, etc.), and then created a game plan to address it all.
The Model S is an amazing car, with the Model X likely to follow suit. When Tesla reveals the Model E, they will have arrived at mass production and other categories are likely to come after that. There are critics that say existing automakers will easily compete with Tesla by releasing their own electric cars, but I believe those critics are overlooking some very critical issues experienced by established companies including corporate culture, politics, and existing ties, not to mention the extensive R&D needed to make an appealing EV option.
In regard to valuation, I invest with five- to-ten year time horizons. Tesla will be worth more than it is today within that time frame. If the company executes how I think it will, it will be valued over $100 billion + within that timeframe, which is roughly 4x its current valuation. Many of Tesla's recent explosive moves to the upside are intensified by the massive amount of shorts, which make many of the short term valuation arguments valid but shortsighted. Similar valuation arguments are usually made with companies experiencing rapid growth, but the market prices companies based on future expectations. Waiting for a great company to be a value can leave an investor waiting forever and never able to establish a position. The huge short float should also help limit short term downside since so many people have already sold it making short term valuation even less of a concern.
Mitch Roider has a five-year track record at Marketocracy, including a $368,000 gain from Tesla.
There are four major reasons why I believe in Tesla and its future.
- Tesla’s “just in time” manufacturing
- Tesla’s direct sales channel
- Tesla’s customer support through updates and the supercharger network
- Tesla’s modular battery and motor design
These four factors are entirely disruptive to the auto industry, and, thus far, no competitor has been able to mimic or follow them. Even individually, each of the items listed is a major accomplishment or impressive differentiator, but combined, this gives Tesla an 18-36 month lead at minimum over any competition.
I predict that by 2016, Tesla will be selling a $35,000 car that can travel between 200 and 250 miles on a single charge. With the supercharger network in place by that point, the car would be drivable across the country. Once this milestone has been reached, Tesla will go from making 20,000-30,000 cars per year to 150,000+ per year. They will become a significant force in the industry.
Bearing all of this in mind, I expect Tesla to have a larger market cap than Ford (NYSE:F), which is roughly 4x Tesla’s value today.
Wayne Dalhke has a ten-year track record at Marketocracy, which includes a gain of $441,000 from Tesla.
Three primary factors influenced my decision to purchase Tesla as a stock for my portfolio. First, electric or hybrid electric vehicles offer the United States its best chance to get out from under the yoke of foreign oil, specifically the OPEC nations. Most of the OPEC nations are countries that, from a political standpoint, do not care for the United States, but love our dependence on them for oil. The money spent each month on foreign oil could be much better spent improving our infrastructure to support a more self-sustaining energy future.
Second, the price of the stock at the time of purchase was highly influential in my decision. I purchased the stock in my virtual portfolio in August 2012 at approximately $30 per share. Since that time, I have recouped my initial investment several times and have been able to reinvest the money in other stocks that I like.
Lastly, my purchase decision was based on corporate governance (Musk), business model (direct sales), the potential for growth, and future research that would need to be done. The research necessary to improve the storage capacity of batteries, as well as the investment in an infrastructure to support an all electric fleet of vehicles, demonstrated Musk’s vision for the long term with Tesla squarely situated in the playing field. Tesla will not be a “flash in the pan” fad that will come and go.
As they improve their manufacturing and sourcing, develop better battery types and modularity, and gain wider acceptance in the mainstream, the prices of their vehicles will come down to where the average person can afford them, rather than just the wealthy. This will increase stock price, dividends, and profitability over the long term.
Other factors that have influenced my decision to hold the stock for the long term involve the partnerships and investments that Musk has made, which are not directly related to Tesla as a company, but I believe show serendipitous effects. For example, he is heavily invested in Solar City, a retail energy generation company based on a model of providing the basic infrastructure at little to no cost, but reducing the amount of dependence on large electricity producers through a Power Purchase Agreement (PPA) that guarantees a certain output over the life of the system at a fixed cost. I personally have this system for my home and am very happy with it so far.
While hope is not a plan, I would like to see Tesla work with other companies in the storage and power production arena to reduce our dependence even further on foreign oil and reduce our emission of greenhouse gasses. While Tesla is “just a car manufacturer,” I believe they have the potential to drive change in a number of different arenas because they produce a unique vehicle with unique manufacturing requirements. Some of these companies would be Axion Power (AXPW), First Solar (FSLR), and GT Advanced Technologies (GTAT).
Of course, there will always be people who will disagree; however, I find it affirming that when I surveyed our investment research community, I discovered three traders with excellent long-term track records whose opinions about Tesla are generally consistent with Eugene Groysman’s investment thesis about this company. All four of these portfolio managers have made money on Tesla, which is one of the best indicators that they know what they are talking about.
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.
