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What Are Tesla Investors Betting On?

At the beginning of the year, I had the strong sense that it was a good time to invest in Tesla. I had never bought stock before, but from covering the Tesla Model S and other electric vehicles, I got the sense that a ton of people were not properly evaluating the future of the automobile, the likelihood that electric car sales would surge and take over. Naturally, Tesla is the icon of this industry. It is not only an awesome electric car, but is also widely considered the best car ever mass manufactured (by auto journalists and gearheads). Its manufacturing was just starting to ramp up, things were going well for the company, and it looked like 10 years or so of investment were indeed going to pay off.

Sure enough, with one positive announcement after another, Tesla’s stock jumped, and jumped, and jumped. I wanted to kick myself for never making the time to set up a trading account and buy some stock in the company. I now have a trading account, but I still haven’t invested any money anywhere, and I’m unlikely to invest in Tesla anytime soon. By pretty much all reasonable standards, Tesla is grossly overvalued at the moment. In an interview with CNBC, Elon Musk (Tesla’s co-founder, CEO, and Product Architect) even seemed to say so.

Nonetheless, I wouldn’t necessarily say that people who have Tesla stock right now should dump it. I do think I understand why so many people have invested in Tesla, even as the stock price has risen to an insane level. Before writing about that, though, let’s just take a quick look at a few numbers and graphs.

This is a one-year look at Tesla’s stock price trend:

tesla stock tsla stock

It’s stock price is currently at $193.37.

On January 2, it was approximately $35.

BofA Merrill Lynch thinks Tesla’s true stock value today is around $45. BofA Merrill Lynch writes: ”We continue to view Tesla shares as vastly overvalued and maintain our $45 PO, which is based on a 2015e EV/EBITDA multiple of about 12X (currently 12.7X).  We note that our valuation multiple is relatively consistent with the simple average of 2015 EV/EBITDA multiples for a group of 35 growth oriented tech companies, based on consensus estimates.”

At the moment Tesla is worth about 44% what GM is worth. Christian Science Monitor writes: “GM has built over 450 million cars in its 105 years while Tesla has made about 25,000 over 10 years.”

Really, the projection for how successful Tesla will be in the future (based on how much people are investing in Tesla) is extremely optimistic. And, notably, it’s increasingly retail investors (not institutional investors) who have been betting on Tesla. Here’s a chart on that from BofA and Bloomberg, via NASDAQ:

TSLA Ownership change

One more quote from BofA is as follows: “We estimate that Tesla’s current share price implies approximately 628K vehicle sales in 2020 (versus an estimated 21K in 2013)…..Generating luxury margins on a mass market vehicle is likely to prove incredibly challenging, and represents another major hurdle to the bull case, in our view.”

Quite frankly, people investing in Tesla over the past few months have an extremely optimistic view of Tesla’s future role in the automotive industry. Again, even Elon Musk has acknowledged that the optimism is very “generous” — and that was actually over a month ago, long before Tesla’s stock price approached $200.

So, on to the topic in the title….

What Are Tesla Investors Betting On?

Shai Agassi recently made the point that the company that leads the way into a new market is often generously rewarded for years or even generations to come. The hope here, for those who have been investing in Tesla, is twofold:

1) that electric cars will explode (in a good way), taking a huge portion of the automobile market;

2) Tesla will dominate that market.

Frankly, I’m a firm believer in #1, but I’m not so sure about #2. I wouldn’t bet against Tesla becoming a major auto manufacturer, but I certainly wouldn’t buy stock in Tesla at the moment, since I think the chances of it not becoming so huge are also considerable. But back to the investors (not me)….

Why would Tesla dominate the EV market? There are a few good reasons for that. First of all, as Shai noted, there is very much such a thing as “first mover’s advantage.” Tesla will forever hold a historic role in the history of the electric car, and the automobile as a whole. Tesla transformed the perception of electric cars — more than once. And Tesla has created electric cars like no other.

Furthermore, as noted above, Tesla’s Model S has been recognized as a superb machine. Not just a good car, not a great car, but by many accounts the best car on the market. Not a luxury car, but a “performance car.”

Both of those things put the Tesla brand in a very good place. It very much does make Tesla something akin to Apple for the automotive world. Tesla, like Apple, opened up a whole new market. Like Apple, it is known for unmatched quality and dedication to perfection. Like Apple, it is doing many things in a different way business-wise, in a way that sets it up for growing rockstar status and consumer obsession. Once it starts producing cheaper vehicles that still have Tesla quality, performance, and branded (targeted for 2017 — promised, even), it could very well come to dominate the electric car industry, and industry that will be much, much larger within a few years.

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The counter to that is that the major auto companies of today have economies of scale they can benefit from and actually are indeed electrifying their lineups at a fairly fast rate now. They are also beginning to build more electric models from the ground up, which will result in better electric vehicles that are designed to take advantage of their numerous strengths. They could potentially squeeze Tesla into a corner of the EV market.

However, as noted above, there are reasons to have faith that Tesla will plow forward and defy odds as it has done for years, that it will become as well known as BMW or Mercedes, that it will grow to an annual sales total equal to 44% or even more than 44% of GM’s total.

It is definitely a risky investment. But people have read the stories of Google investors, Apple investors, and Amazon investors who have become rich through their foresight, through their faith in the future. And I think that, combined with all of the above, is why Tesla’s stock has climbed so high and continues to climb, even as it is so far above what the likes of Goldman Sachs and BofA Merrill Lynch think it’s worth.