I usually don’t write about stocks because stock picking is a horrible idea for most. Those who can successfully beat the indices over the long-term (10+ years) are very rare and of those who are successful, how much of it is due to luck? Most just don’t have the time to do the research and more importantly, possess the temperament to make the right decisions under duress or euphoria.
Another problem with owning stocks is the mental bandwidth the strategy consumes. Because I own stocks, I feel that I need to think about them, almost daily. This is yet another reason that I’m a big fan of index investing now.
But, I still own stocks from my days as a stock picker and Tesla is one of them. The stock has been in the news a lot lately because it’s had a tremendous run. The stock was up about 50% in January alone. I’ve been thinking about Tesla lately. A lot.
And one of the best ways to work through your thoughts is to write them down, so today, I give you a post on Tesla.
Musk Is Cool And So Is The Model S
I don’t buy many individual stocks these days, but when I did, I mostly bought them for subjective reasons. I liked young tech companies with loads of potential to change the status quo. My strategy was the opposite of a dividend investor where everything is about numbers and a bet that things remain the same. I like change and disruption.
I also admit that I have bought stocks for ridiculous reasons. I picked up Tesla back in 2012 for two reasons:
- Elon Musk is ^$%*ing amazing. This sentiment has only grown stronger. Musk is changing transportation with Tesla. And what’s harder than producing cars? Space flight. He’s revolutionizing that too. Is there a more important human alive?
- The Model S is a beautiful car. I’m not into big, 4-door sedans, but the middle-school car freak in me loves the Tesla’s lines anyway.
So, I bought Tesla stock because I liked the guy running the company and it makes cool cars. Not exactly in-depth analysis. But, sometimes you get lucky anyway. At the time of this writing (2/7/2020), my shares are up 1,159%. The ones that I purchased in 2012 are up 2,473%.
My investment portfolio was up $83,582 in January. The 168.15 shares of Tesla that I own were responsible for $38,013 of the gain. The stock started the month at $424.50 and ended at $650.5. Craziness.
I bought Tesla for purely subjective reasons, but now I’ll dive into numbers. Specifically, I’ve been thinking about market cap (value of all outstanding shares) and sales numbers. Here is how Tesla’s numbers stack up to Toyota:
So, Tesla has a lofty valuation. Tesla sells 4.5% of the cars Toyota does but has a market cap of 67% as big. Tesla’s stock price has big expectations baked in.
However, these numbers don’t tell the whole story because luxury vehicles are where the money is at. Toyota makes a profit of about $2,300 per vehicle. Luxury vehicles have much higher margins. For example, Porsche makes $17,000 per car sold. Tesla doesn’t state what it’s margins are, but Tesla’s numbers will get better with time:
- Tesla is young and still investing heavily in expansion. These expenses will go down at the company matures.
- The drivetrain of an electric car has only a couple of moving parts. Electric motors make internal combustion engines look like Rube Goldberg machines. Traditional auto manufacturers spend hundreds of millions developing internal combustion engines.
- Batteries are getting dramatically cheaper.
It wouldn’t surprise me if Tesla has some of the most profitable vehicles in 5-10 years.
But right now, Tesla stock is priced very, very high.
Is My Analysis Wrong?
I was talking to Pete (aka Mr. Money Mustache) who is also a big fan of electric cars and he said that I’m looking at the wrong data:
Regarding Tesla vs other automakers, I think it makes sense not to compare the total car sales, but the total number of electric cars sold.
In this light, Tesla’s sky-high valuation makes more sense, especially if you believe the following:
- Electric vehicles are the future. Electrics made up 2.2% of sales in 2019. Within 5 years, the cost of an electric vehicle is expected to be the same as a fuel-powered vehicle and after that, electric cars become cheaper. By 2030 if not earlier, I expect that over half of passenger vehicles sold will be electric. If Tesla keeps its current share of the electric car market, its sales will explode.
- Tesla has a big head start. Other manufacturers are not sitting still, but it will take a while for them to catch up.
- Tesla will continue to innovate. The most important component of an electric car is the battery and Tesla is the clear leader in the development and production of them. Tesla seems to have amazing developments in store too.
But, Tesla is a speculative, long-term play. There are plenty of risks too:
- What if a competitor came up with vastly better battery chemistry? What is someone figures out how to use super-capacitors instead of batteries?
- Maybe Waymo will perfect SAE Level-5 autonomy rendering car ownership a dinosaur causing all vehicle sales to plummet?
- Maybe Musk will smoke a crazy strain of weed and come up with a design even more insane than the Cybertruck causing Tesla to turn into a lithium fueled dumpster fire? I kid, I kid!
However, it’s’ important to keep this in mind:
At the moment Tesla is an auto manufacturer.
It’s an unusual one, but it is still just making pods to move humans quickly from Point A to Point B. Same as Ford and Honda.
Some speculate that Tesla will reach a trillion-dollar market cap before the decade is out. For this to come to fruition, one or more of the following would have to happen:
- Tesla becomes the biggest car manufacturer in the world.
- Tesla wins the race to develop true SAE Level-5 autonomy (a car that requires no driver). If Tesla perfected this, I’d expect the company to also start a ride-sharing company. Without drivers, this service would be very lucrative and also end vehicle ownership as we know it. (I REALLY hope this happens!)
- Tesla becomes something completely different. Perhaps it patents a superior battery technology and licenses it to the rest of the world.
- Building on the previous bullet point, Tesla has the potential to revolutionize how we use energy. Perhaps one day, Tesla is known as an energy storage company that used to make cars? Don’t underestimate this business.
…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.Donald Rumsfeld
I have had some great success picking stocks:
But, some of the reasons these stocks have appreciated so much are due to developments I never saw coming:
- Amazon: Most know Amazon because of its store, but most of its profits come from its cloud computing platform. I didn’t see that coming.
- Facebook: Instagram is contributing to much of facebook’s profit growth. Facebook didn’t own Instagram when I bought it. I didn’t see that coming either.
Will Tesla be selling 25,000,000 vehicles per year in 2030 and have a trillion-dollar market cap or will it be bankrupt?
I have no clue.
But, if either of these scenarios happens, it will probably be due to some circumstance or development that I couldn’t have seen coming.
However, I’m hanging on for the ride. It’s usually a bad idea to bet against Musk.
Join the 10s who have signed up already!
Subscribing will improve your life in incredible ways*.
*Only if your life is pretty bad to begin with.