There are many, many sites that do a fantastic job of using analytics, financial information, quarterly reports etc to help you decide on good investments. Those are all NECESSARY. Ignore them at your peril, beginner-investor! However, its also important to evaluate the qualitative elements of an investment, and that is what we’ll be discussing in this two-part series. Because the market is nothing if not emotional as a pre-teen at a One Direction Concert – with panics, blind adoration, and reactions to every emotion between the two.
CASE STUDY: TESLA MOTORS:
Tesla is not a renewable energy company. But it is an incredible innovator and trailblazer in sustainable business and that qualifies it to be discussed here. I am an investor in Tesla and have been for enough time now to have benefited tremendously from the doubling of the stock. Twice. It’s solid at around 400% gains in my portfolio and it feels terrific.
The stock is hovering at an astronomically high P/E ratio (how much profit it makes compared to what a stockholder pays for a share). It only really has one product (two if the Model X makes deliveries before the end of the year as planned for the Third Quarter). It competes in an established international industry with heavyweights like Ford, GM and Toyota. It should surprise no one that there were far more naysayers than believers even a short two years ago. In fact, when Tesla made the announcement that it was profitable two years ago, it was one of the most shorted stocks in the world. Even today many people still think the company will fail.
So. Why were they wrong, and why were some folks able to recognize that they were wrong? How did a few spot the miracle before it happened?
It was possible because it wasn’t a miracle. Wasn’t even close. It wasn’t luck either, unless you subscribe to the saying:
“Luck is where preparation meets opportunity.”
What Tesla had to demonstrate was preparation, and a will to seize the right opportunities, which it has done, consistently, since Elon Musk took over the company from Ze’ev Drori in 2008.
PREPARATION and SEIZING OPPORTUNITIES:
Preparation is something controllable and that we can all research given a browser, access to Google and a subscription to the WSJ. As with any game-changing product, engineering and technology were a primary focus, building a new car from literally the ground up. By vertically integrating as much as possible, Tesla was not only able to engineer better mileage (a typical electric car problem), but also keep costs down and ensure quality. Tesla has the capacity to scale in a huge way. Another company Elon founded, SpaceX, also focused on much the same approach -building a better product at a cheaper price point (which is impressive when what you are building is rockets). And it had a factory. When the opportunity struck to buy an old Toyota factory at a fraction of the price (still really expensive), Elon Musk jumped on it. This is obviously glossing over quite a bit, but the point remains that when the opportunity arose to enter the market, Tesla was prepared with a beautiful, high quality, high-technology car, and a place to build them all at an extremely reasonable price point.
Having a quality product and being able to consistently deliver more and more cars, continue to make more and more revenue, being in the position to take advantage of loans, and then taking the opportunity to pay them off early, taking every opportunity to leverage good press paid off. If the chart below isn’t convincing, then I can’t teach you anything, Jedi Master.
Another critical point is that most “Cult Stocks” – so named for their cult-like following despite insignificant revenue or financial fundamentals, primarily due to a perception of some kind of ‘potential’ – can only succeed if they fundamentally re-invent something, usually some kind of business model. Tesla did this in a couple of ways.
First – Rather than focusing on the cost of an EV, as many traditional carmakers do, they focused on range. Range was a lynchpin challenge, because solving it was critical to overcoming the biggest objection to EVs – Range Anxiety. The fear of running out of electricity in the middle of the highway, or halfway through a long road trip. By solving this one problem, they were able to distinguish themselves, and redefine the general concept and problems associated with Electric Vehicles.
Secondly – Tesla chose to sell its cars differently. Rather than rely on independent dealerships to sell their cars (and possibly tarnish the brand’s reputation for quality and luxury with fluxuating prices or varying levels of service) they sold directly to consumers. They did not allow their customers to drive their cars off the lot, instead customers made a deposit for a highly demanded car with the prospect of receiving a delivery to their house at some future date. By selling differently, Tesla protected their brand, and built up anticipation among existing and future customers.
Many organizations will do extremely well. Many more will do alright. But if you are looking for stocks with potential for truly explosive growth, you must look for companies that are disrupting the status quo with something bigger better cheaper smarter. Some recent examples may be LinkedIn (recruiting and professional networking), Netflix (TV and streaming video), SpaceX (another Elon Musk company but this time in Rockets!), Uber (taxis), and Personal Capital (personal finance and investing) to name just a few that come immediately to mind.
CONTEXT and the ENVIRONMENT:
Tesla is impressive. But just being able to spot a new business model, or a reinvention of an existing product isn’t really enough to identify those that will succeed. Ultimately there is an element of luck at play here (as frustrating as that may be) and there always will be. How lucky was Tesla to be able to seize that factory in California? How lucky is it that California (especially in silicon valley) has experienced such an insane growth of high-net worth individuals who can afford a car in the most sustainable and progressive state in the country? While certainly much of Tesla’s success is by design, was it really design that part of the American Recovery and Reinvestment Act (ARRA) gave credits for hybrid and EVs, and special loans to sustainable business?
All of these environmental factors matter just as much to Tesla’s success as any one thing that Tesla did internally to drive that growth. Without those loans from the ARRA and the federal government, Tesla would almost certainly have folded under the incredible pressure of the financial crisis. These are all things to think about.
PREVIEW PART II – SETBACKS v THE KILLING BLOW
In fact, setbacks are a part of the process, and if at any time during those setbacks early investors had sold their Tesla stock, they would have missed out on incredible gains. What’s important to remember though, is that this fact is balanced against any number of companies that seemed to be doing outstanding, until they suddenly take a few mis-steps and fold.
If you are interested in Tesla, here are some great in depth articles about the company I have collected over the years – several of which I referenced to write this article:
- Morgan Stanley Reiterates Overweight Rating, $47 PT on Tesla Motors on 1Q13 Preview – Benzinga
- Why Everybody Loves Tesla – Bloomberg Businessweek
- Tesla’s Exhaustive List of 2013 Accolades – Motley Fool
- Tesla’s Model S Sedan Destroys Safety Tests … Literally – Bloomberg Businessweek
- Tesla readies mass-market Model E while other EV makers tread water – Extreme Tech
- Tesla Has More Loyal Followers Than Joe Carroll, Shorting It Is Not Easy – Seeking Alpha
- Tesla’s Next Trillion-Dollar Industry – Business Insider
- Tesla’s Direct-Sales Push Raises Auto Dealers’ Hackles – Bloomberg Businessweek
- How Elon Musk Turned Tesla Into the Car Company of the Future – Wired
So what do you think are the reasons for Tesla’s success? Share in the comments what you think caused Tesla’s incredible rise.