Edo Duran's picture

Still bullish on TESLA?

There has been a lot going on in the automobile industry in the last couple of months. I will turn back to my previous analysis from the HOLT Community Competition where I picked TSLA over VW. From this standpoint it seems to be the right move especially because of the known problems with the Volkswagen software fraud. But, I think that eventually VW will bounce back and continue to be one of the biggest car manufacturers and maybe this is the right time to buy VW stocks concerning the huge loss of value, but for now I will turn back to my analysis of Tesla. 

The justification for picking TSLA can be found in the future, as with every other great growth story, rather than in the current company fundamentals. On the one side we have a negative cash flow, high investing in CAPEX and still negative earnings since its founding; on the other side high multiples compared to its peers show that great optimism is surrounding TSLA.

I will list three things that I think are the most probable reasons for this kind of optimism. 

First, TESLA is the luxury electric car pioneer and is without adequate competition, for now. The Tesla flagship Model S scores 103 of 100 on the Consumer Report which confirms that no other automotive company manufactures similar quality products in this field. The same quality can be expected from Model X. Since my previous analysis TSLA achieved delivery targets and they are on a good path to do the same in the last quartile.  

Second, TSLA is currently in “the right place at the right time” concerning market sentiments for electric cars. The electric car market is growing fast and if Tesla manages to take a high level of market share and continue to make superior products it can grow on the same principles as Apple. Tesla can be more than a regular car manufacturer; it can be seen as a way of life.

Tesla aims to become a mass producer of electric vehicles and that expectation is already built in forecasted prices. It seems that the key element of this plan is success of the Gen III model – a mass market model which is expected to have a base price of $35,000. This plan is closely related to my next point.  

Third, and I think most importantly, is the success of the ambitious project Gigafactory. CEO Elon Musk said Tesla’s Gigafactory received its certificate of occupancy on Thursday and will begin producing its first lithium-ion cells by spring. Success of the Gigafactory will bring down the cost of producing batteries by as much as 30%. Given that 25% of COGS goes to batteries, this will result in improved margins and also open the door for the Gen III model. This project is currently running on schedule and with minor delays it will be able to produce batteries in Q2 of 2016 and reach full capacity in 2020 to support mass production.

To reflect on my previous analysis, I think that Tesla is on the right path to become the future of the automobile industry. To invest in a company like this you must believe that such a company will be able to continue to disrupt the industry and that customers will accept a new era in the automobile industry. There are lot of risks surrounding Tesla, like competition (we cannot expect that automobile giants will sit quiet), production constrains, penetration of the Asian market, the Gigafactory success etc. But I would like to quote what Musk said about Henry Ford, “He was the kind of guy that when something was in the way, he found a way around it, he just got it done. He was really focused on what the customer needed, even when the customer didn’t know what they needed’’. I noticed many similarities between these great minds of our time and I think that Musk is one of them and he can be something like the next Henry Ford with the success of Tesla.