The Innovator's Trap - Inevitably, Tesla Will Face The Same Fate As Apple

May.30.13 | About: Tesla Motors (TSLA)

If you held Tesla (NASDAQ:TSLA) over the past few months, you quadrupled your money. If you were on the other side of the trade, its the quintessential example of how gruesomely wrong a short bet can go. In the wild kingdom, it would have been the equivalent of being caught in front of a stampeding herd of buffalo with nowhere to turn. The mechanics of a short squeeze are never pretty (if you are on the short side, that is).

2013 has been the year of the short squeeze. Heavily shorted names such as Netflix (NASDAQ:NFLX), Herbalife (NYSE:HLF), First Solar (NASDAQ:FSLR), Barnes & Noble (NYSE:BKS), BlackBerry (NASDAQ:BBRY) and GameStop (NYSE:GME), (just to name a few) have benefited from a hard charging bull market and made for strong comeback stories. Indeed, as many smart money traders and analysts look towards the future, high short interest is as bullish a catalyst as ever, and "short squeeze risk" now deserves a category of its own. We have learned, time and time again, never to underestimate the effect of everyone rushing for the exits at the same time.

The Tesla, As A Product

I have test driven the Tesla, visited several stores, and witnessed personal friends vie for a coveted spot on the waiting list (over 6 months) to get behind the driver's seat of one of these cars. Tesla changed the world in a few ways. Firstly, they proved that an electric car does not have to sacrifice performance and luxury. Check out the Tesla S beating out the BMW 5 Series in a drag race. It's wicked cool. The car has gotten critical acclaim from far and wide, and a statistic went out that 25% of people who test drive the car, end up buying it. (For now, I am one of the 75%.) Now, it's always a great sign that a company can't keep up with demand, but in Tesla's case, it's just plain ridiculous.

Tesla had conquered a great deal of the cynicism it's encountered thus far, but its business model is certainly not without (well, at the moment, unanswered) flaws. Check out what one observer noted:

Somebody's going to make a lot of money when it crashes. It is more than obsolete, it is nonfunctional. A 30-minute charge at a Tesla Supercharging Station will provide a half charge, good for about 140 miles. That's about 2 hours driving. So rather than traveling at 70 mph, you're only going to manage 56 mph with stops for recharges. It gets worse. Consider my least favorite road, I-95. The typical vehicle volume between 10 a.m. and 2 p.m. is about 5,000 vehicles per hour. So on that 140-mile stretch of roadway you have about 10,000 vehicles, of which 30% are locals that recharge at home. That leaves 7,000 vehicles that need a charge plus about 2,000 sitting in the charging stations. That comes to about 60 charging stations per mile. It ain't gonna work.

All I can hope is that this fellow didn't put his money where his mouth is!

Now Enter The Samsung's Of The World ("Me Too" Products / Non-Innovators)

Lets review a ubiquitous case study and apply it to Tesla.

Now before I move any further, let me explain who I categorize as "The Samsung's of the world", and other such non-innovators.

In 2007 Apple (NASDAQ:AAPL) came out with the iPhone, and revolutionized the smartphone. In 2009 Samsung (OTC:SSNLF) introduced the Galaxy, a "Me Too" product that took the idea of Apple's full screen phone, and along with Google (NASDAQ:GOOG), attempted to make incremental improvements on the product Apple pioneered (they added a larger screen, attempted to give it better battery life, etc.).

Categorically, Samsung does not innovate. Samsung has built a multi billion-dollar business selling thousands of products by taking other innovations and "optimizing" them; i.e. adding incremental improvements. As such, Samsung has become the world largest Optimizer, or builder of "Me Too" products. One CNBC contributor said it particularly well (paraphrased): "All Apple would have to do to stop Samsung in their tracks would be to stop innovating; Samsung would be finished because they would have nothing to build imitations of."

In this case, AAPL (Innovator) and Samsung ("Me Too" Product) are currently neck-to-neck in the smartphone space. Look at how within only two years, a non-innovator can penetrate a market and command such impressive share.

The Samsung's of the world are already working on a "Me Too" product with minor incremental improvements on Tesla's innovation, and they will start eating away market share within a year or two. Tesla broke the ice and more so solidified that the market is willing to pay a rich multiple for a high tech auto.

Like vultures scouting for their next meal, the Samsung's of the world are already building their "Me Too" versions of the Tesla S. What does this mean for Tesla shareholders? It means that competition is on its way. It might not be today or tomorrow, but somewhere in the world, at this very moment, "Me Too" products are being designed, tested, and prepped for delivery straight to Tesla's backyard.

Disclosure: I am long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.