On Monday August 12, 2013, fellow Seeking Alpha contributor Ashraf Eassa penned an article called "Tesla: Be Ready For A Massive Crash." The premise of the article is that Tesla is overpriced due to QE-induced excess liquidity, speculation and a short squeeze. Mr. Eassa's article goes on to discuss the boom/bust cycle of irrational markets a la George Soros' The Alchemy of Finance. However, Mr. Eassa's article makes many spurious connections to "comparable" situations that I believe need to be addressed.
Let me start by saying that I do not disagree with Mr. Eassa in the view that Tesla (NASDAQ:TSLA) investors/speculators need to be vigilant with respect to keeping a pulse on market sentiment, and that price appears to have overshot intrinsic value. I am also not investing in Tesla shares at these prices because, as Mr. Eassa points out, everything that goes up must come down.
I do believe, however, that some of the points with respect to the "Tesla as a bubble" premise were a bit off the mark in Mr. Eassa's article. Let's look at them, one by one.
Comparing Tesla to Dot Com Bubble Companies
In my view, comparing Tesla to dot com internet companies is unfair. Many of the darlings of the dot com bubble had precarious business models. Many of those companies tried to solve problems that many consumers did not care about at the time. WebVan [now part of Amazon.com (NASDAQ:AMZN)], for example, tried to develop an ambitious home grocery delivery network. It signed a $1 billion contract with Bechtel to design and construct warehouses across the country. However, WebVan was building out its infrastructure without considering their service wasn't really demanded by consumers, or the underlying business fundamentals of its operating model (food costs, delivery costs, heavy cap ex, etc). The WebVan story ended in bankruptcy because they didn't consider the industry dynamics for home delivery of groceries, consumer adoption rates and overspent on a razor-thin-margin grocery business.
Tesla, on the other hand, is clearly in demand. It addresses a problem consumers and society need to solve: efficient, sustainable and high quality transportation. Tesla has lean manufacturing techniques (described below) and sells its product for premium prices leading to rich margins. In my view, that is a better business model than many of the doomed dot com companies.
Management "Smiling" During Share Dilution
I don't really understand the statement Mr. Eassa described in connection with Tesla's recent equity raise with respect to management "who seemed to smile and nod during said dilution" since CEO Elon Musk and management have substantial skin in the game. In fact, Mr. Musk put up another $45 million in the secondary offering. As such, management's interests are aligned with shareholders: to maximize value. Unless one thinks that Elon Musk and management don't care about their net worth, then they might think the equity raise impaired the value of Tesla. Mr. Musk and management, on the other hand, apparently believed that the equity raise would allow them to increase the value of Tesla over the long term. I think it's fair to say that Mr. Musk knows what he is doing at this point.
The secondary offering paid off certain government loans [$440 million Department of Energy ("DoE") loans] and provided capital to fund further expansion. Having repaid the DoE loans was a significant catalyst in my mind because Tesla no longer must adhere to the onerous reporting requirements the government imposes, and it added credibility to Tesla's operating model. It seems to me that the equity raise did have a drastic impact on the share price -- a parabolic move, much, much higher. I guess that would put a smile on my face too.
Comparing Tesla to GM
Tesla's operating model is quite different than GM (NYSE:GM), Ford (NYSE:F) and the rest of the major car manufacturers. It has a direct-to-consumer model, whereby customers are required to pre-order (and to pay a retainer upfront) their Tesla automobile. There is no middle-man auto dealership (i.e., no sharing of revenue) and no inventory building up on dealer lots thereby requiring drastic price cuts to move inventory. Tesla is a premium brand, and its operating model which creates a sense of exclusivity garners premium prices (pricing power). The majors would give their left hand for that type of operating model, in my opinion.
Tesla is better able to manage its supply chain and manufacturing processes because it forecasts demand with real numbers - customer orders - rather than guessing. Because of Tesla's direct-to-consumer model it will also realize better margins on its sales than the majors because it doesn't share revenue with auto dealers.
Mr. Eassa' points out that Tesla only sells to the rich. That may be true at this point - Tesla's sticker prices are high. However, the total cost of ownership moves closer to parity given that Tesla automobiles do not require expensive fossil fuel and the Tesla comes with guaranteed resale value - personally guaranteed by Mr. Musk, in fact.
The salient point in my mind is that the Tesla story reminds me of Clayton Christensen's seminal book, The Innovator's Dilemma. In the book, Mr. Christensen posits that the innovator's dilemma is that the innovator can make both the right and wrong choice at the same time. For example, a business may decide to cede the lower end of a market to focus on higher margin products and services. In the short term, it's the right move for shareholders - higher profitability. But over the longer term, it can turn out to be a disastrous choice because once the new entrant captures the lower end market, the new entrant then starts climbing its way up the value chain, sometimes with a disruptive operating model, to compete with the incumbent. In the case of Tesla, it started out at the super high end of the market to gain enough share to start to work its way down the value chain to the mid market. As Tesla builds economies of scale and is able to attack the mid-market (Ford and GM's sweet spot), I would be shaking in my boots if I were the incumbents.
Additionally, Tesla also doesn't have legacy pension liabilities, unions, or a lot of capital tied up in excess manufacturing capacity. Therefore, Tesla is a much more nimble company than its competitors, and has the ability to design both a better car and a better car company - one that minimizes capital intensive capacity (lean manufacturing) and improves working capital (customers pay a deposit upfront), leading to increased productivity and profitability. Tesla has the opportunity to create a disruptive enterprise.
Finally, there is no comparison between Tesla and the majors engineering prowess or design aesthetic. By all accounts, Tesla automobiles are far superior to the majors' cars. Consumer Reports seems to agree, awarding Tesla's Model S with its highest rating ever - a 99 out of 100.
Comparing Tesla to UniPixel
In my view, comparing Tesla to UniPixel (NASDAQ:UNXL) is a canard. Based on my admittedly limited understanding of the UniPixel story, I understand that there has been, and continues to be, scrutiny with respect to the veracity of its management team, and the product quality of its main product, Uniboss. For a quick overview, UniPixel describes UniBoss as:
The UniBoss™ production process enables the printing of fine line conductor patterns on flexible film substrates. This process can produce ultra-fine line (<6 µm width) conductive lines and patterns that can be used for many printed circuit applications. With our process we can also print pads for connectors along with our circuits, and depending on your design we may be able to eliminate the need for adding separate flex-connectors directly to the film.
Based on that description, I'm not quite sure exactly what that UniBoss is, but I'm pretty sure it's very dissimilar from a car. In fact, the two main issues underlying the UniPixel story: bad management and bad product are directly opposite to the Tesla story.
Tesla management and its product are best-in-class.
This article is not meant to be a shot at Mr. Eassa. Rather it is meant to present countervailing points because, after all, that is what makes markets. Mr. Eassa is a prolific author in the tech sector, and presents many thought provoking articles to consider.
Tesla, however, is a game changing company. It is altering the way we think about transportation and sustainability. 10 years ago, electric cars were a design joke and the total addressable market limited to the environmental conscious. Tesla, on the other hand, is a best-in-class automobile company, and, in my opinion, it's only a matter of time before they start capturing more market share. Moreover, their direct-to-consumer operating model, presale requirements and lean manufacturing techniques make Tesla's operating model quite unique relative to its incumbent competitors.
I wouldn't pay $18 billion for Tesla right now. Discerning investors might well get another shot at Tesla soon.
Tesla is a company worth investing in at the right price, not speculating at any price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.