About a year ago there was an unusual investing seminar I was able to attend. Usually at these types of events, financial experts talk about market conditions, various economic indicators and general investing. They normally have a main speaker that focuses on something like emerging markets, macro-economic forecasts, or structured debt etc. But this time believe it or not, the main speaker was a classic car aficionado who was there to talk about; you guessed it, investing in cars.
It is a poignant sign of the times when financial professionals are suggesting cars as good investment strategies, considering that cars are normally not something that even car aficionados look at as an investment. However, the speaker and topic turned out to be surprisingly insightful, and segued perfectly for a visit to the art museum next door that had a classic cars exhibit. And while investing in cars is something the average IRA or small portfolio investor will be unable to entertain, the notion has a really interesting relationship with something that is happening right now.
Enter Tesla (NASDAQ:TSLA). Its stock has appreciated about 67% since its IPO in 2010, and almost 15% for the week thus far in anticipation of deliveries of the Model S later this week. This has happened in spite of years of losses, very high volatility and nearly 50% short interest. In one sense, TSLA stock has been a very good investment that has outpaced indexes and even most hedge funds by leaps and bounds. But on the other hand, to say that it has very high volatility is a bit like calling a tornado "gusty". It has outpaced most other investments in terms of risk as well.
TSLA has been subject to substantial daily price swings for reasons such as relatively minor personnel departures. Moreover the company has very little room for execution and design error, even if the Model S rollout goes perfectly later this week (which past execution performance indicates will likely be the case), there is still a great deal of inherent risk. For the investor with a low risk tolerance, TSLA is not a strong candidate.
However there are a lot of positives on the near term horizon for TSLA that could boost its stock. They will soon be delivering the Model S to excited deposit holders, and with about 10,000 deposits, they expect to deliver about 6,000 of them by the end of 2012. This is expected to bring them close to break-even, which is at around 8,000 Model S (according to Musk at the most recent shareholders meeting earlier this month). Beyond that, the future for TSLA becomes less clear.
Nobody really knows how much demand they will be able to draw for the Model S and the subsequent Model X. Even with 10,000 deposits, reaching the breakeven point is not guaranteed. Demand after all, is the fundamental piece of the puzzle -- not battery technology, rare earth metals or design (as suggested by many hotly debated analysts).
Most people that have followed TSLA can imagine scenarios where the company can sky rocket and become the next Ford (NYSE:F) and a car industry icon for the next century, or where they just struggle along in the niche markets for many years to come. In the meantime, most investors have probably spent more time than they would like assessing marketing strategy, estimating future demand drivers, and doing sales projections to name a few. So in the long term TSLA is still a big unknown, and may not be the relatively risk free long-term investment that many people would prefer to have in their portfolios. So is there a better way to invest in TSLA? Going back to the investment seminar, what if instead of buying stock, an investor just bought one of the cars?
The idea of investing in cars sounds counter-intuitive, but oddly enough, there is a plausible case that buying one of TSLA's cars might actually be the better way to invest in the company than buying stock. It may only be relevant to the small amount of people who are considering purchasing a TSLA car in the first place, but then again many of the people I have spoken with are looking at purchasing a car and stock, or vice versa. For people that do not want the volatility and risk of the owning stock, buying one of the cars could turn out to be the best option. Instead of buying $50,000 worth of stock or options, it might actually end up being a better investment to just buy a Model S.
In an industry as old as autos, there are countless comparisons of similar companies with lofty goals. The reality is that many times before, a carmaker has created a new product but been forced to stop production, leaving behind a relative handful of finished vehicles (sometimes of very high quality, which would be the case for TSLA). Economics 101 tells us that if supply cannot match demand, prices will rise. Classic cars are actually a poignant illustration of the principle. Classic Mercedes with gull-wing doors have gone up in value astronomically. What would happen if TSLA closes its doors after making only 500 Model X? Stock prices will deteriorate but the car values will rise. What happens if the Model S or X turns out to be a smash hit? The stock price will almost certainly rise, but so too could the worth of the cars.
In another scenario, early adopters could drive their new Model S for a year, only to find that they could sell it for more than what they paid for due to supply not yet meeting demand. The stock volatility will be avoided, and in the event that TSLA fails as a business venture, then a car buyer will have purchased a very rare car that will appreciate with time. And lastly, if TSLA becomes the next Ford, then early adopters will have one of the first editions and a very high quality car if they choose to drive it. So while it might not be for everyone, looking at "investing" in TSLA from this perspective is yet another reason why TSLA is doing something unusual. And as the keynote speaker somewhat facetiously noted, the best part about investing in cars, is that even if their monetary value drops to zero, you can always drive them (which is a lot more fun than claiming a stock loss on your tax return). For now though, even investors just interested in the stock should continue to see TSLA shares thrive, as positive reviews and happy ownership stories begin to accumulate.
1954 Mercedes 300 SL
Original price: $11,000
2012 price: $700,000-1,000,0000
Tesla Model X
Disclosure: I am long TSLA.