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Why Tesla is Like Apple Except the Valuation

July 18, 2013 | About:
I’ve been following Tesla (TSLA) not as a value investor but as a car enthusiast and recently as a business.

My first car was a Hyundai Excel passed down from my brother. I wish I could find a picture somewhere but the car below looks fairly close except for the blue streak and the color was silver. After a few months of driving it around, I sold it and bought a bike much to my parents dismay.

Being young and thinking I was invincible, I got myself a hot yellow Honda VTR as my learner bike. I loved that bike.

One year after, I ended up moving to Seattle and bought a Honda Prelude which was a car I wanted badly while in high school. 6 months later, one of the engine cylinders died on me.

Not to be deterred, I found another childhood car I yearned to drive. A Volkswagen GTI, which I still love driving today.

jae-automobile-progress.jpgMy Automobile Progress

But I would trade it for a Tesla any day.

As a car fan, here are some “qualitative” thoughts about the car and Tesla itself.

  • It’s electric, it’s sexy, and it’s mind numbing fast
  • First electric car to win Motortrend’s Car of the Year award
  • People buy Tesla to use in drag races and kill the competition
  • People seem to get hooked into the instant acceleration response
  • No complicated engine and other mechanical parts
  • Drive it properly and you do not need to replace brake pads
  • Tesla sells the experience
  • Unlike the Nissan Leaf, it doesn’t look like a frog
That’s a scrambled list of thoughts, but a result of thinking about Tesla a lot the past couple of days.

With any stock that shoots from $30 to $120 there is a great story behind it.

Stocks do not trade based on fundamentals. I wish it did, then efficient market theory would be true and investing would be easier. But stock prices are made up of fundamentals and emotions.

Stock price = fundamentals + emotions

However, you don’t buy a stock like Tesla for its fundamentals

The Emotional Side of Tesla

Tesla is a great story and it reminds me of Apple (AAPL).

Apple Similarity #1: One Crazy Leader

You have a visionary genius in Elon Musk, who is merciless when it comes to perfection and execution.

The guy has now created three companies that exceed the billion dollar mark. PayPal, Space X and Tesla. How many people on this planet have been able to achieve that?

No one dare laugh at his crazy ideas because he makes it happen.

Apple Similarity #2: Revolutionary Product

An electric car that people want to drive. Just 1-2 years ago, people were laughing at electric cars. Chevy’s Volt did a good job for the mass market, but it doesn’t come close to the level of a Tesla in terms of performance, looks and specs.

The cars are a game changer. Think back to the launch of the iPhone. I laughed at it. Now I’m laughing at my stupidity.

Apple Similarity #3: Rabid Fanbase

Talk to a Tesla owner and they won’t buy another internal combustion engine (ICE) car again.

Men love it, women love it.

Car owners are very emotional when it comes to their cars too. More so than people with iPhones.

You already have crazy fans modifying it into pink bat mobiles.

tesla-pink-batman.png

Also, when people are using the car to participate in drag races and blowing away the competition, you know that you have something special and the fanbase will only continue to increase.

Apple Similarity #4: Market Size and Potential

The market size is also huge. Even optimistic estimates put sales of all of types of electric vehicles at only 20% of the US market by 2020.

Regular cars are not going anywhere for decades either. Better technology is enabling higher fuel efficiency and cheaper prices. Hybrids were supposed to start killing sales of regular gas engines, but when you can get 40 miles per gallon on a similar sized car at $10k cheaper, people will continue to buy gas engines.

Nevertheless, the auto industry is huge and the growth potential is clearly there.

Apple Similarity #5: The In-store Experience

Tesla does not sell through dealerships and it is a brilliant idea.

Their distribution strategy is online or through their showrooms.

tesla-online-buying-process.pngPick a date, choose your options, enter your credit card and your product will be delivered or ready to pick up.

Tesla throws away the traditional route of going to a dealer, looking through lots of different cars, haggling with salesmen, and wasting a whole day to purchase a car.

The price is the same for everybody so there is no chance of getting upset that you just paid an extra thousand than the person walking out the door.

Instead of going through the painful process of buying a car, it has become an easy and enjoyable shopping experience.

The Range Dilemma?

The problem with Tesla is that you can’t take a serious trip with a max range of 300 miles.

But is range really the issue?

When all I had was a bike as my mode of transportation, every non-biker told me how inconvenient it would be. No cargo space and no passengers. I found things to be more convenient. I even rode in the rain, hail, bought groceries, delivered 20″x20″ boxes and performed other tasks easily with just a little imagination and effort.

It’s the same with electric vehicles. It seems ridiculous to people who do not own one, but to those that do, they rave about it.

Ok, if you live in an apartment with outdoor or underground parking, it won’t be possible because you cant charge the car overnight. But for the rest, it will be like charging your phone before you sleep. Wake up the next day and it is ready to go.

The REAL Problem with Electric Cars

What happens if you forgot to charge the car overnight and you are close to running out of juice during the day? How do you charge?

This is the real issue. It’s called charge anxiety. Once you plug in your phone to charge, you keep it plugged in even when it is 100% just to make sure you have that extra charge.

Looks like it is the same thing with cars. In a car park that is completely empty, only the charging stations spots are taken. Capacity is maxed out with just four cars in this lot.

electric-charge-parking.pngThe real problem. Charge anxiety.

Owners of Nissan Leaf’s and Toyota’s leave their car plugged in all day and hog up space.

Sometimes this happens.

electric-charge-letter.pngApology letter in the electric vehicle community

and this.

electric-charge-letter-2.pngDon’t you dare unplug me

But the Fundamentals of Tesla Look Nothing Like Apple

Tesla is not trading based on any fundamentals or metric at the moment. It is purely a story stock at this time. So I won’t bother trying to value it.

Try running it through the OSV Stock Analyzer and see what assumptions you have to come up with to get a fair value and then ask whether those are realistic assumptions.

Here’s a tip, analyst earnings growth projections come in at 1762% for next year. I don’t even know how to use that number in an analysis.

tsla-chart.pngExponential Rise

Tesla’s stock price = emotions + great story.

Disclosure

No position

About the author:

Jae Jun
Founder of Old School Value (http://www.oldschoolvalue.com) dedicated to offering the most complete and detailed stock valuation and analysis spreadsheet. Investing made easy by importing 10 years of financials and 5 quarterly statements directly to excel for your analysis needs. Save time, make smarter decisions and make more money.

Visit Jae Jun's Website


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