Let me open with this: in a 1.2 Trillion dollar industry where every major automaker is now being coerced (some kicking and screaming) into the electric vehicle market, Tesla Motors (TSLA) is the catalyst and technology leader.
Many people claim that TSLA is a risky bet. And at first glance, the company's financial statements seemingly point entirely to that conclusion. However, I'm going to outline a few reasons why I think Tesla is seriously undervalued by the market (notably the shorts) and in fact make an argument why there is actually a very strong floor in the company's stock price, creating a borderline immaculate risk/reward opportunity for longs.
For a disruptive company like Tesla, I want to make it clear that the qualitative story and intangibles are immeasurably more important than current financial figures. This is because after years of R&D, Tesla is just now ramping up production and selling its flagship and cutting edge Model S electric sedan - which by the way, competes head and shoulder with the best of the best German luxury ICE vehicles. If you don't know about the Model S, watch this Car and Driver review.
Tesla is just loaded with intangible assets and goodwill. For starters, nearly every relevant social, economic and political trend is pointing in the company's favor:
- The trend toward sustainability - resulting in 'green' becoming a status symbol,
- The cost of oil (and energy) is rising long term as the world develops,
- US desire to get off foreign oil is growing,
- A protectionist mindset in the US is advancing - this is an American company after all...and an American engineering marvel of a car at that; something to be proud of,
- Trend toward supporting entrepreneurial effort,
- The desire to be unique is as strong as ever (how much longer will luxury options rest almost solely on BMW, Mercedes and Audi),
- Political support is strong (HOV/carpool lane access, subsidies, friendly loans, tax credits, ZEV requirements - like in California).
Perhaps as a result of all of this (notwithstanding the competitiveness of the Model S itself) accolades were just waiting on the car's arrival - reviews of the Model S have been absolutely glowing and the awards are piling up.
Tesla is the industry leader in EV technology by a long shot (and remember, virtually every major automaker is now working on electric vehicles of some kind). As simple evidence: the performance of the existing Model S sedan is better than the projections of a concept electric-hybrid sports car BMW has planned called the i8. Talk about being ahead of the curve! To back up its lead in engineering and expertise, Tesla owns ~250 patents related to electric powertrain, battery and general automotive technologies they've developed as a forerunner in the electric space.
In addition to these assets, many intangibles are simply built into Tesla's increasingly famous entrepreneur CEO, Elon Musk. The man is well known for starting PayPal and running the rocket company (on top of Tesla) that is taking the place of NASA. He is idolized both by aspiring entrepreneurs and academics. He's acquainted with countless A-list celebrities, many of whom are Model S reservation holders and willing endorsers. Mr. Musk was the inspiration for the Tony Stark character in Iron Man and even made a cameo in the movie himself. His reputation is only beginning to bud, and without a doubt, by the end of his life he'll be hailed as one of the greatest innovators and businessmen of our time. This is only added publicity and credibility for Tesla.
The tremendous upside and capped bottom in Tesla's share price can be explained in a triumvirate of information.
- The possibility of stand-alone business success - the shorts all think Tesla will fail on its own, however, there is a chance (I would argue a very good chance) for unbelievable success for the company. But nevertheless..
- A huge percentage of Tesla's share float is sold short. At first this short interest looks to be a really poor signal for the company's stock - however, I believe these short sellers are missing a really important point...
- Tesla's contingency plan in the event they are unable to finance their business independently will be this: offer the Tesla brand, patent portfolio, and electric technological know-how for auction to a herd of large laggard automobile manufacturers.
I'd like to assert that Tesla's enterprise value is worth at bare minimum $26 per share (or $3B) to one of the major automakers. If electric cars truly are a meaningful part of the world's automotive future, as R&D dollars being spent across public and private sectors might imply - a mere $3 Billion or 0.25% of the $1.2 T auto industry would be a very small investment to make if it meant leap-frogging the entire pack to the front of the innovation curve. I do understand this is a very simplistic comparison but I want to put into perspective the amount of dollars at stake here if electric drive is indeed a big part of the future of mobility. Looking through these eyes, my gut tells me that placing a for sale sign on Tesla Motors would likely spark every automaker in the world to recognize a profoundness of opportunity - creating a remarkable bidding war to the benefit of current shareholders. I imagine the acquisition valuation placed on Tesla's brand, engineering expertise, and patents would be pushed well into the 6-8 Billion dollar range (or $52-70).
The extremely problematic question short sellers must now ask themselves is this: "What do I think would happen if there was ever even the slightest rumor of an auction or hostile takeover of Tesla?" My intuition tells me that this possibility, in combination with the exorbitant short interest Tesla stock has, would in all likelihood be the cause of the short squeeze of this decade - potentially rivaling even Volkswagen '08. Come to think of it, a short squeeze like that might just make for a beautifully unmanufactured publicity blowup, especially if Tesla wants to sell a bunch of cars down on Wall Street.