RE: I Bet On Tesla Because Most Investors Don't Understand Electric Cars

Jan.12.14 | About: Tesla Motors (TSLA)

This is a response to an article written by Chris Umiastowski, a 10-year veteran of the sell-side equity research, tech investing expert, and special contributor to the Globe and Mail. Here is the link to the article: I bet on Tesla because most investors don't understand electric cars. Please note that it's the Globe and Mail that titled his article. It's surely controversial. I suggest you read his articles first to have a better understanding of his though process and my response. Chris tends to focus on longer-term trends rather than short-term trading opportunities. I know Tesla is a very popular stock on Seeking Alpha with many smart bulls and bears. I'm sharing this with the purpose to better inform potential investors and exchanging. Enjoy!

Dear Mr. Umiastowski,

Your article published on January the 6th state that the main reason for "betting" on Tesla (NASDAQ:TSLA) is because most investors don't understand electric cars. You also provided insights about the future of the electric car industry to justify your analysis. I respectfully disagree with your thesis and I believe its sending the wrong message to potential investors. The main reason investors are staying away from Tesla is valuation based, not because they don't understand electric cars. Most people don't even understand how a gasoline car works but as long as the car gets them from point A to point B that's sufficient. I could write a similar article titled "Invest in GM because most investors don't understand a piston-timing system". Comedy aside, understanding electric cars is not the reason people invest or don't invest in Tesla. The point of the article is to address the risks associated with Tesla and to educate the reader.

First, your article does a good job addressing several misconceptions about electric cars such as battery life. Your article was interesting and you are right that the cost of production will decline as volume increase. I'm also fascinated with the Tesla story and I believe it has a great future ahead. Elon Musk, founder and CEO, is a true visionary and what he has accomplished so far is incredible. I think the best for Tesla is yet to come. As you mentioned, the market for electric cars will only expand and I might consider one for myself.

I like Tesla the company, not the stock. A new hip company with a cool CEO with a great future doesn't guarantee it will be a great investment. The future of Tesla's potential is already "priced" in the stock. Tesla's valuation is astronomical and lets not talk about the financials (such as accounting errors) because nobody will finish reading the article. By buying Tesla today you better hope that there's nothing wrong that happens along the way, like having another car catching on fire. With that kind of valuation, you should only expect perfection.

Your article brings me back to the "dotcom" bubble era back when the investing world was divided in two, the old economy and the new economy. The old economy was filled with old boring companies like manufacturers and industrials. Nobody wanted to invest in that old dinosaur world. The blue chips of the old economy were profitable but were under threat of disappearing because the emerging new economy. In the new economy, you heard sexy stories about how a certain company was going to reinvent a certain market. Today you hear about how Tesla is going to reinvent the car market. Statements like this are common. They are exiting and make us feel smart in conversation. A nice exotic story about a company like Tesla intellectually resonates with us. However these statements play tricks on our brain often lead to buying overvalued stocks. The craze surrounding Tesla is buoyed by outrageous projections of endless growth backed by unbridled optimism. The growth is perceived to develop in a straight-lined fashion without disruption. The reality is that Tesla will face disruption in its growth, it will face challenges in the future, competitors will adjust, and trust me it will rain when it's supposed to be sunny. Today the dinosaur stocks are still alive and are as profitable as ever. I don't need to elaborate on what happened to that magical new economy.

At the core of a great investment is when you buy an asset below its intrinsic value and sell it above it. That's how you make money in investing. The rest is speculation, a game where people are great at losing money. Buying Tesla is a highly speculative momentum stock. Momentum stock swings in any direction for no reason and sometimes higher price is the reason for higher price. Tesla's stock can sky rocket upward or crash with the flinch of a Tweet. What's Tesla intrinsic value? What's your margin of safety? How many investors are buying Tesla today without looking at its stock price 10 times a day? Assuming you couldn't sell it for five years, would you have it in your portfolio? Even if these optimistic projections play out perfectly, you need nerves of steel to hold this stock for a period superior to five years.

Warren Buffett, the world's most famous investor, is loading up on GM (NYSE:GM). Why? Because GM is an excellent company trading at a depressed 8.7 times next year's earnings as opposed to Tesla 98 times 2014 projected earnings. It's reasonable to think that GM might eventually trade at 12 times earnings. Is it reasonable for Tesla's trading multiple to increase to 100 times? In 2013 GM sold approximately 10 million cars vs 25,000 for Tesla. Ford, another boring company from the "old" economy, just hiked its dividend by 25%. It's also not a good sign when the CEO Elon Musk tells the media it's not crazy to short Tesla. Get the hint?

My suggestion to potential investors is don't buy stocks based on great storytelling. Do your homework approach "sexy" stocks such as Tesla with prudence. It's easy to get caught in the mania with the "I won't miss the boat this time" mentality. Too many investors have been burned with this approach. Stick with what works. It's important for investors to have an idea of what Tesla's valuation is before buying it, that way you will have a more solid understanding of the company and you will have a better idea if current price warrants such a premium. If you are regular mom and pop investor or you have limited knowledge of the investment world, leave the speculation to the traders and take your hard earned money to good old boring reliable stocks. You will also sleep better at night. Mr. Umiastowski you are right that by investing in Tesla you are "betting". I want to buy a Tesla car, not the stock.

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.