On June 8, Barrons published its latest cover story, an expansive critique of Tesla Motors (TSLA), in which author Bill Alpert laid out, once again, the short thesis for Tesla Motors. The critique, while well written from a linguistic standpoint, featured little in the way of new information; most of the arguments against Tesla featured in the piece are well known, such as concerns over Model S battery technology and the size of the market opportunity for electric cars. Should shares of Tesla continue to drop over these concerns, we believe that it should be seen as a buying opportunity. In our view, shorting Tesla will be a losing proposition in the long term. As we laid in our previous article on Tesla, the company has secured its position as the 4th United States automaker, and its financial & market position give Tesla the platform it needs to achieve future success. However, we believe that shorting shares of Tesla is a losing proposition not only from a fundamental perspective, but from a capital markets perspective as well. In our view, both Salesforce (CRM) and Amazon (AMZN) serve as strong examples of why this is the case, and we delve into our thesis below.
Critics of Tesla will likely recoil in horror at the idea of seeing Amazon and Salesforce being used to defend the company. Given that Amazon and Salesforce are two of the most overvalued companies on the market, run by CEOs who care neither for profits (applicable to both Jeff Bezos and Marc Benioff) or for transparent communications with investors (applicable to Marc Benioff, but also Jeff Bezos to a degree), surely this is a sign that Tesla itself is overvalued, given the fact that these two companies are being used to defend it? This is not the case we wish to present. Our comparison focuses not on Amazon or Salesforce as companies, but on the role of institutional, retail, and insider investors.
Institutional Investors: A Fear of Being Left Behind
In past articles, we have laid out in extensive detail why we believe that shorting Salesforce is a losing proposition. In essence, our argument can be distilled to one constituency: institutional investors. These investors, led by Fidelity, which owns nearly 15% of the company, have steadfastly refused to sell their stakes, even as Salesforce has soared nearly 880% from its 2004 IPO (Fidelity, for example, has been an investor in Salesforce for virtually its entire life as a public company). We have argued that much of this lack of selling stems from an inability to do so. Investors such as Fidelity cannot sell their huge stakes without placing enormous pressure on shares of Salesforce, thereby forcing them into what is essentially a holding pattern, unable to sell (or buy, given likely internal limits on the size of stakes) shares in meaningful amounts. However, there may also be another element to this: a fear of being left behind.
Growth-oriented investors (the kind that invest in companies such as Tesla, Amazon, or Salesforce) have a natural fear of being "left behind" (although we do not believe in "growth" and "value" labels, for in our view all investing is value investing, given the fact that all investors seek to create value, no matter its source, we will utilize them in this article for the sake of simplicity). Given the risks inherent with growth investing, namely high multiples and in many cases, intense competition, growth rates need to be as high as possible in order to induce a reduction in relative risk. And Amazon and Salesforce both have high growth rates, at least when judged on the metrics deemed important by institutional investors (revenue growth, user growth, billings growth, etc…). The fact that critics of these companies believe these metrics are deeply flawed barometers of success is irrelevant. Perhaps they are. This article is not meant to be a discussion of the qualitative characteristics of these metrics. Rather, it is meant to highlight that institutional investors of both Salesforce and Amazon use these characteristics, and for better or worse, they believe that such characteristics are accurate barometers of success.
A fear of being left behind manifests itself in high rates of institutional ownership for both Salesforce and Amazon. As of the end of Q1 2013, the 10 largest institutional investors of Salesforce controlled 52.47% of the company's outstanding shares, while Amazon's 10 largest institutional investors controlled 31.33% of the company's outstanding shares. For Tesla, the figure currently stands between those 2 companies, with 41.95% of outstanding shares controlled by the company's 10 largest institutional investors. Such levels of institutional ownership, as is the case with Salesforce, will likely serve as an impediment to a major fall in Tesla's share price, for these investors (once again led by Fidelity with a stake of nearly 15%), are unlikely to sell their stakes in meaningful amounts for the foreseeable future, due to both a lack of desire, and in Fidelity's case, a potential inability to do so.
Individual Investors: Placing Faith in the Story, and Investing With Founders
The 2nd leg supporting Tesla shares is the individual investor, and as with institutional investors, Tesla shares certain characteristics with both Salesforce and Amazon, characteristics that strengthen the company's defenses against short sellers. Amazon, Salesforce, and Tesla are, for many investors, more than just another company in their portfolio. They are among a select group of companies that many individual investors truly believe in, for they each offer a "story" to get behind, and each started out as the challenger attempting to break into and disrupt an insular industry. Amazon began with a mission to change the way books are sold, and in the process, has changed the very nature of commerce and consumption, both here in the United States, and abroad. Salesforce began with a mission to change the nature of software, and since its founding in 2004, has become a leading challenger to top-tier technology companies such as Oracle (ORCL). And Tesla began with a mission to change the automotive market, and is now proving that electric automobiles do have a role to play in the future of the automotive industry, challenging both incumbent luxury companies and more mass-market manufacturers as well.
Companies such as Amazon, Salesforce, and Tesla have the ability to attract individual investors because they offer a compelling story to invest in, a story that is promising from both a corporate and financial perspective. Many individual investors remember the case of Apple in 1997, where many Wall Street observers had wrote Apple (AAPL) off, even after Steve Jobs had returned to take control of the company. And many of those investors also remember that those who ignored the supposedly sage advice of Wall Street observers and bought shares of Apple when skepticism was highest made fortunes. The "story" of Apple and Steve Jobs proved to be a powerful one, both in terms of their ability to change many markets and their ability to deliver enormous profits. And the "stories" of both Salesforce and Amazon have proven to be powerful on both fronts as well. Despite multitudes of observers, both on Wall Street and in their respective industries that argued neither company could succeed, these two companies have not only reshaped their respective industries, but created fortunes for their investors as well. Since its 2004 IPO, Salesforce is up almost 880%, and Amazon has risen over 16,000% since its 1997 IPO. From the very beginning of Salesforce and Amazon's corporate lives, individual investors have seen a myriad of doubters proven wrong as Marc Benioff and Jeff Bezos execute their long-term vision. This track record has created a mindset amongst many individual investors that such CEOs are smarter than those who observe them. It is important to note that this mindset is not rooted in emotional attachments to either Marc Benioff or Jeff Bezos (as well as Elon Musk). It is rooted in empirical evidence (with a somewhat cynical twist) that seemingly every time that these CEOs have come under fire from either Wall Street analysts or industry observers, they have proven them wrong. It is almost as if these observers serve as a contrarian indicator. The more criticism these companies receive, the more potential they must have.
The 2nd aspect we wish to address within the theme of individual investors is the role of insider ownership, specifically founders' stakes. Individual investors are constantly reminded of the importance of insider ownership, of the need for management teams to have "skin in the game." And when it comes to Salesforce, Amazon, and Tesla, few investors have more "skin in the game" than Marc Benioff, Jeff Bezos, and Elon Musk. Marc Benioff, despite the unending criticism he receives from Salesforce critics (particularly here on Seeking Alpha), has much to lose from a collapse of Salesforce stock. With a stake of 10,212,500 shares (to say nothing of hundreds of thousands of stock options), Benioff himself owns nearly 2% of the company (based on 590 million outstanding shares). While critics may argue that this is far from a sizeable stake, we believe it should be viewed in the context of Benioff's overall net worth (currently estimated by Forbes at $2.6 billion). Based on Salesforce's June 10 closing price of $38.68, this stake is valued at $395,019,500 or 15.19% of Benioff's net worth. The figures for Jeff Bezos are even higher. Jeff Bezos is Amazon's largest shareholder, with a stake of 86,970,020 shares, or 19.1% of Amazon' currently outstanding shares. Even more importantly, this stake, valued at $24,444,663,521.40 based on Amazon's June 10 closing price, comprises virtually all of Jeff Bezos' net worth, estimated to be $25.2 billion. For all the criticism levied as Amazon as a company with a cavalier attitude towards its investors, it is somewhat ironic to see that not only is the company's largest investor its founder and CEO, but that founder and CEO is confident enough in its prospects to tie up virtually his entire net worth in said company. The situation at Tesla has played out in a fairly similar fashion. After the close of the company's recent secondary offering, founder and CEO Elon Musk owns 28,287,366 shares of the automobile manufacturer, thereby making him the company's largest investor with a stake of 23.84% (based on Tesla's 115,552,703 outstanding shares at the end of Q1 2013 and the 3,108,481 shares sold in the secondary offering). This stake is currently valued at $2,830,150,968.30 (based on Tesla's June 10 closing price), and makes up nearly 63% of Musk's $4.5 billion net worth. Elon Musk, like Jeff Bezos and Marc Benioff, holds a sizeable percentage of his net worth in the company he founded. When individual investors see such confidence from founders, it is only natural to believe that the company in question will be successful. After all, who knows more about these 3 companies than their founders? If they believe these companies are a good investment, then logic suggests that these companies should be seen as good investments by individual investors as well.
With over 28% of Tesla's shares sold short, despite its sizeable rally during the course of 2013, it is clear that there is still a healthy level of skepticism amongst investors regarding the company's long-term potential. As we have argued in previous articles on Tesla, we believe such skepticism is unwarranted. Furthermore, we believe that shorting Tesla will be a losing proposition, not only because of the company's healthy fundamentals, but also because of the nuances of Tesla's investor base. Like Salesforce and Amazon, Tesla has a strong institutional investor base, one that is not only unlikely to have a desire to shed their stakes, but will also have a difficult time doing so. And like Salesforce and Amazon, Tesla is led by a CEO who has a meaningful portion of their net worth invested in the company he founded, a CEO with a long-term vision and a track record of success. Given the presence of all these factors, we believe that shorting Tesla Motors will be a losing proposition in the long run, and that should a pullback materialize, it should be viewed as a buying opportunity.