Tesla (TSLA) has been a dynamic company to follow since before it went public in 2010. It is one of the latest and most promising of the many companies that have taken a shot at all-electric cars. In spite of being unprofitable by standard measures and having short interest at over 50% of float, its stock price, which is currently around $36, has nearly doubled since the IPO. Recently I was thinking about a comparison I heard between TSLA's CEO Elon Musk and Ford Motor Co. (F) founder Henry Ford. Musk has also been compared with a modern-day Howard Hughes and served as some inspiration for the character of Tony Stark in the recent "Iron Man" movie series. Musk's latest release, the TSLA Model X, was the topic of my previous article, which talks a little about TSLA's marketing challenges and triumphs. In addition, a fellow SA contributor compared TSLA with Apple (AAPL) not long ago. While the comparisons are interesting in many ways, they are by no means a singular reason to buy TSLA shares. I prefer to rely on more fundamental tools of evaluation, however I have to admit that when it seems like there is a dearth of just that, sometimes less direct analysis can yield insight and add more color to the picture. The previous comparisons made me want to explore how TSLA looks when compared with Ford (F).
Exploring the idea made me wonder if the Model S or Roadster could really be the Model-T or A of the 21st century. And if as we watch TSLA develop, it is really like watching a modern day F speeding through its adolescence as a company and into maturity. However comparing the two is problematic, considering that F began nearly a century before TSLA, while TSLA has barely 10 years under its belt. While it is easy to draw parallels, it is not quite apples to apples when the divide is so great. So I thought maybe if I would try to compare the first decade or so of F with the TSLA; it might be a little more relevant. Some of what I found could be considered reasons why TSLA may or may not turn into the next F, and some of it is just plain interesting. Most of the contemporary information in the following comes from what I already know of the two companies from investment analysis and research. Most of my historical knowledge of F is limited to what I have studied of Henry Ford in management texts (Ford is considered a somewhat foundational figure in the management field for his use of assembly line production amongst other things), so some of the information regarding F is derived from the all-knowing (facetious) Wikipedia.
This goes without saying, but both companies have truly pioneering founders. Ford and Musk both have shown a unique ability to see things differently, a willingness to do things differently, and a willingness to take great risks. Additionally, they both have backgrounds in engineering/science, which they later applied to business. And both founders were in their 40s when their respective businesses began to "take off" so to speak. Moreover both leaders changed fundamental business models, most notably Ford with his use of assembly-line production and in a sense ushering the in the decline of horse-driven transportation, and Musk with his ongoing attempt with Space X to take space exploration private and his contribution to PayPal and perhaps for bringing EVs into the mainstream.
Each was founded around the turn of a century.
Each was founded as passenger vehicle company.
Each utilized new technology.
Each seems to have similar marketing plans: start by showing/proving how great what they can do is, begin small scale production at relative high prices, as production climbs use economies of scale to lower prices in step with volume.
Each relied on multiple rounds of outside funding.
Each went through periods of volatility in the beginning (and thereafter for F).
Each had connections to Nicola Tesla. Before devoting himself to automobiles, Ford worked for Thomas Edison, a chief competitor and contemporary of Nicola Tesla. And TSLA takes its name from Nicola Tesla. In addition, TSLA and Nicola Tesla in a sense utilized the same goal, to harness electricity.
Each can claim a great deal of responsibility for making their respective technology/products jump from the niche/hobby realm and into the more mainstream; F certainly more so than TSLA at this time. By 1914 (twelve years after inception) F had sold over 250,000 Model T cars (keep in mind there were fewer than 100 million people in the U.S.). General Motors (GM) and others were also helping drive (no pun intended) the market at that time, somewhat like the Chevy Volt and others are doing today for TSLA.
Each of the companies' first major iterations of products was at the high-end of performance. Ford broke the land speed record with one of its first designs, which proved its legitimacy and garnered extra demand and financial support. And TSLA started with the high-priced high-performance Roadster, to show that electric vehicles are capable of performing at the same levels as more traditional types. The Roadster also helped TSLA garner additional demand and financial support.
Each shared technology with competitors in hopes of accelerating growth, innovation, and of course revenues.
While the founders of both companies could be called family men, Ford appears to have had a more stable home-life and was married for over 50 years, whereas Musk has already experienced multiple marriages. Additionally, Ford largely began making his vast fortune with F; he experienced no major financial success previous to F. However Musk has already attained a large amount of financial success from other enterprises, mainly from his contribution to PayPal. Moreover, Ford's business interests were primarily focused around the umbrella of F. Meanwhile Musk is currently involved in two other significant ventures, Space X and Solar City.
While F essentially created the market for passenger vehicles and the automotive industry, TSLA is essentially entering into that very same market a century later.
While F had sold hundreds of thousands of vehicles in its first ten years, TSLA has sold only thousands.
While TSLA has stayed within its current form since inception, F essentially failed as a venture and was reformed before attaining widespread success.
World dynamics/landscape have changed vastly between the two times the respective companies were started. That is obviously too broad a subject to cover in this article. But for example, air travel was just beginning to come around (which F actually contributed to). With TSLA on the other hand in present day, oil is a very mature industry, and nuclear energy and even space travel are already charted territory. Additionally, in 1900 the entire U.S. population was only around 76 million, which as contrast is just about 1 million over Research In Motion's (RIMM) most recently reported subscriber base. The population of New York in 1900 was 3.5 million, while Los Angeles, was just over 100,000. In 2011, there were almost as many vehicles sold than the under 2 billion people on earth in 1900.
Since its IPO in 2010, TSLA has been subject to GAAP rules of accounting as a public company and has relied heavily on public funding. F on the other hand, did not go public until 1956 (over 50 years after its founding) and enjoyed great success as a private venture, and Henry Ford is said to have not believed in accountants. F was privately funded at its inception and for some time after.
In conclusion, there are striking parallels between the two companies, even when only comparing the first ten years of each. While the comparison added some color to the picture, I am not sure I found anything to trust as much as a balance sheet. Although I would assert that TSLA certainly has already shown tremendous potential by setting itself up to pounce on the niche EV market, probably more than any other before. That position can be cemented if its sales and production go as planned in the next two years. So should everyone go out and buy a bunch of TSLA shares? For those with a high-risk tolerance it poses a great growth opportunity, particularly over the next year. It has already doubled in price since its IPO in 2010. However there are good reasons why over 50% of TSLA shares are sold short right now, and it has the volatility to prove it.
In his aforementioned articles, one of my fellow SA contributors begins the discussion of TSLA by comparing it to Apple from a somewhat academic perspective. However he overlooked a critical element of the picture that people coming at it from more of an objective point of view might find more apparent. That element is actually the same when comparing TSLA with AAPL as when comparing TSLA with F; the type of market. F and AAPL entered into nascent growing markets, while TSLA is entering a very mature market. F and AAPL both experienced phenomenal growth after in many ways creating what were new markets. TSLA however does not have that luxury as it enters into the over 100 year-old automobile market. Moreover, particularly with regard toward AAPL, there is a big difference between selling a phone that part-time baristas can afford without maxing out their credit cards, and selling a car that has a base price that is higher than most American families make in a year. In other words TSLA's products and positioning will not likely be what ultimately decides how close TSLA comes to outgrowing the niche EV market and becoming a 21st century F. Even if TSLA exceeds all expectations with their upcoming models, TSLA's real master, is still demand.
Outside of niche markets, the demand for electric vehicles is most determined by more traditional vehicles, and consequently fuel prices. So if TSLA only wants to stay in the electric vehicles business without diversifying into some non-vehicle market, its development beyond being a niche provider is highly dictated by outside factors. While average gas prices in the U.S. at present have risen roughly 400% since the beginning of the 21st century, it is still relatively cheap. And the automobile industry, even in Europe where fuel has been considerably more expensive, still predominantly centers design on fossil fuels. Fuel prices have to continue growing significantly, and surpass a tipping point in order for electric vehicles to outgrow the niche market. So does this mean that TSLA will fail unless fuel prices skyrocket and investors should jump on the shorting bandwagon? As with going long, that is only for those with a high-risk tolerance.
In spite of being highly leveraged on the fuel prices, TSLA shows a tremendous amount of potential for a company little more than 10 years old, very much like an emerging F. While it notably has yet to show a profit (and is indebted to federal grants), if it sells 30,000 vehicles over the next few years (as it plans) at a base price of $50,000, that will yield $1.5 billion in revenue. The average selling price will be higher because of options for the S and X and a tax credit that is factored in, although the volume is still largely speculative at this point (it currently has around 8000 Model S reservations). Even so, with that scenario if it has 30% margins, it would yield $450 million in revenues. If it is only able to sell 8,000 vehicles, that will still be $120 million in revenues. So even pessimists should admit that while the risk is big, the potential is intriguing. Right now TSLA has a lot going for it, and a lot of direct and indirect competitors against it. While it is right where it should be, before we decide whether or not it will become the next F, TSLA first has to prove that it can thrive in the niche market.
My grandfather still tells the story of helping his father start their first Model T. It makes me wonder if in the future, electric vehicles will have become as common as F-150s are today, and my kids might one day be telling their grandkids about charging our first Model S or X. But for now, whether or not TSLA will become a car for collectors, dominate the EV market, or even become another F, is uncertain. The 50% short interest is a very telling indicator; TSLA has a very polarized group of stakeholders. Whichever way it goes in the coming years, volatility will likely recede and it will be very interesting to witness its progression. But with the stock price hovering in the mid-$30s, it is tempting to imagine a meteoric rise. Its future should become clearer once the first buyers take possession of TSLA's Model S later this year and we have more first-hand reviews and sales figures.
Disclosure: I am long TSLA.