Tesla – A Bet on People, Process, and Technology

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Because many of the companies I invest in are just starting out, it’s hard to use to use financial metrics to measure how much the company is worth.  There are no positive cash flows, or profits, or maybe very little revenue to even run any sort of financial analysis on the company.  In most of these cases, I have to find something else that shows a company’s potential whether it be a technology advantage, a great business model, great people, etc.

At a Glance:

Symbol: US-TSLA
Price: $59.50
Market Cap: $6.81B
Yield: N/A
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Stock
Option

In my day job, I’m an technology consultant – focusing on system implementations and business transformations. Having been part of a technology consulting firm, we’ve always fed clients the pitch that a successful project involves people, process, and technology.  My pick in Tesla follows the same principles , especially when it’s hard to value a company that has yet to make a profit.

Tesla is an electric vehicle and components manufacturer. It’s initial claim to fame is the Tesla Roadster (an all electric vehicle based on the Lotus Elise) boasting  300 hp and 273 lb-ft of torque; and a range of 400km:

tesla_roadster

(Source: www.teslasociety.com)

Most recently, Tesla has been getting a lot of attention for the Model S – which won MotorTrend’s 2013 Car of the Year award – and definitely packs more punch with  it’s top performance model at 416hp, 443 lb-ft torque; and a range of 480km:

01-2012-tesla-model-s-fd-autoblog (Source: http://www.autoblog.com)

 

What has helped the stock move up though, is its recent string of great press  – most importantly – that it is about to have its first profitable quarter.

I had heard of Tesla – from the days of the roadster being a star all-electric vehicle with sports car like performance. I only started becoming an investor recently – after a co-worker went on a test drive and came back glowing at the performance, handling, and styling of the Model S. Looked more into the company and although the company had yet to make a profit (or even be cash flow positive), there were plenty of points that peaked my interest.

People

There are only a handful of people in the world that are so visionary, and can see what the world around them is demanding. I look at Steve Jobs and what he did with the iPhone/iPad – literally creating a market by telling customers what they wanted before they even knew. Elon Musk is the co-founder of Tesla and is no stranger to ingenuity having also co-founded PayPal; and also founded SpaceX, a space exploration  company.

Space travel to me is so far in the future, I kinda laugh and write that stuff off as being Star Trek-ish in nature. Electric vehicles are at least a closer step – with energy prices rising, we’ve seen a growing demand for hybrid vehicles. However, hybrids are different from EVs – there are very few 100% EVs out there – the Nissan Leaf, Fisker Karma (no longer in business), and the Roadster. But I came across this gem when researching the company – Tesla’s master plan as posted by Elon himself in 2006:

1) Build sports car
2) Use that money to build an affordable car
3) Use that money to build an even more affordable car
4) While doing above, also provide zero emission electric power generation options

This how far in advance you’ve ever planned….. 7 years later, we’re only in Stage 2 (maybe 2.5). You might think Elon is crazy (space travel, zero emission power generation, etc.) but you can’t doubt his vision and his drive to execute that vision.

Technology

One thing that struck me when my co-worker was raving about the Model S (probably heard from the sales guy), is that the company can rethink how a car should be made – and how much of the design has been built from scratch. Because there is no internal combustable engine, there isn’t a need for items we commonly associate with a car:

  •  a grill (to provide air to the engine)
  • no gears means instant acceleration and torque provided immediately to the wheels
  • battery (heaviest part of the car) sits right on the flow creating a lower centre of gravity

Interestingly enough, some of the Tesla features have been incorporated into standard gasoline cars  to conserve fuel / make a car more aerodynamic.

Starting from scratch also means not having to work with two technologies (like a hybrid). Hybrids came about by taking a car that runs on gasoline and adding a battery component. Perhaps the only other well known sports EV is the Fiskar Karma which basically took a beautiful car; tried to outfit it with batteries and a smaller engine. Turned out that demand fluctuated so much for the Fisker, that the battery manufacturer couldn’t properly plan and eventually went bankrupt. Then after that, so did Fisker.

Tesla developed how the battery would work (thousands of little batteries wired together); and then built the drive-train and the car on top of that. Tack on features like a beautiful 17 inch control panel, great performance features, and nice styling, and you have Motor Trend’s 2013 Car of the Year. Perhaps most telling was from a Morgan Stanley report that surveyed 30 BMW engineers  to raise their hand if they thought Tesla would get this far – and not one hand went up.

Now Toyota and Mercedes (both with ownership in Tesla) have decided to license Tesla’s drive-train in their EV versions of the RAV4 and B-Class. That to me has winner written all over it – if you’re a consumer looking to buy a EV, you might not be able to afford a $100K Tesla Model S (comparable to BMW 7-Seres, Audi A8, Mercedes S550) but you probably can afford a Rav4 and B-Class and that can only help promote the use of EVs. Even the low-end model of the Model S (although now not available due as most are opting for the higher models) goes for $57K (after government rebates) – which really makes it comparable against the standard luxury sedans.

Process / Business Model

When I see the master plan, and the execution of the plan, Tesla is definitely doing this the proper way. To help address all the concerns about range anxiety (running of juice while on the road), they are partnering up to build a network of 100 supercharger stations across the US by 2015. Networks are being created in Canada, Europe, and Asia as well where car owners can charge up their batteries for free.

Tesla has forgone the dealership model of other auto manufacturers and opted to open their own stores to showcase their product – and even hired Apple’s former retail guru George Blankenship to design the stores.

The company also announced agreements around financing and guaranteed resale value of their product – 50% after 3 years making it on par with the other 100K+ luxury cars.

The Model-X (a cross-over) was introduced but the company has decided to focus on the Model S for now, which I also applaud. Focus on your winner; improve efficiency and costs; and then expand.

But…

Tesla plans to sell 20,000 Model S’ this year and reports are the company will announce it’s first quarterly profit this Wednesday. 20,000 cars may be considered a lot for Tesla – but it’s barely a drop compared to the 15M cars that are sold in the US each year (that works out to be 0.1%)

There’s a very long way to go before becoming a Ford – and as an investor, you have to believe in the future of EVs and Tesla’s abilities to execute. Right now, Tesla is valued at $6B – 1/10 the size of Ford – except Ford sold 2M+ cars last year (albeit at 5% margin vs. Tesla’s suggested 10-15% margin).

Can Tesla be profitable? Absolutely. However, they’re also making tons of investments in infrastructure (supercharger network) and capabilities – which will take time to show a return on investment – and also limit how much the company can make. More importantly, is tracking demand of the product. The Model S competes with other $100K cars and it’ll be interesting to note if all the excitement is just from initial demand or if that demand is sustainable and/or growing. A smartly written article points how Tesla already has 100% market share :P. If Tesla continues to show demand and capability to deliver, then Tesla is the real deal.

Advancement in battery technology, capacity, and life also play a role in helping Tesla follow it’s plans. A Model S battery is the most expensive part on the car and if it wants to grow production and make a more affordable car, the price of batteries has to come down – and enough to overcome the cost of fuel (if they stay stable or head lower) or even the cost of ownership against a hybrid vehicle.

My (Short Term) Plans

I plan on holding Tesla for a very very long time – but it’s already been on an incredible run (up 75% YTD; up 10% today alone as I write this post) as more and more positive news comes out. I personally think the valuation has become a little ridiculous at 1/10 the size of Ford based on one upcoming profitable quarter. Some of the run-up may be because of a short squeeze (what’s a short squeeze?) with 40%+ of the stock shorted; momentum – some hedge fund posted a thesis that Tesla would reach $200 within 5 years; but I suspect it is the buy on rumour, sell on news phenomenon.

So, my short term “gamble” is to buy a May $57.50 2013 put option (what’s a put option?) currently fetching $3.50 – so if the stock were to tank after earnings release, I would limit the loss to $54 ($57.50-$3.50 for the option).

If the earnings release is spectacular and the earnings go up, I will have missed out on any price increase up to $3.50 because of purchasing the option. However, for a company so volatile and with so many factors pulling the stock price in either direction, it seems like a reasonable amount to pay for insurance. I wouldn’t do this short term play every quarter – just thought that now was a perfect time given how much the stock has gone up and the expectations that are currently on the company.

The Final Word

So, in short, I love this company – I love what’s it’s doing, where it’s going, and how it’s getting there. My investment is a bet on people, process, and technology in a disruptive model for how a car company should operate and a global move towards lower emissions and consumption of fossil fuels – and a little short term bet on the side as insurance.

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3 thoughts on “Tesla – A Bet on People, Process, and Technology

  1. Pingback: Tesla reports, then defies gravity | Fearless Cal's Investment Journal

  2. Pingback: Some quick updates and trades – in 250 words or less | Fearless Cal's Investment Journal

  3. Pingback: Tesla: Short Squeeze or Irrational Exuberance? | Fearless Cal's Investment Journal

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