During the first quarter of 2017, Tesla (NASDAQ:TSLA)’s stock price increased 30.24% to $278.30 per share. Tesla is Baron Partners Fund’s largest holding and represented 14.2% of this focused Fund’s gross portfolio investments (18.2% of net assets) at quarter end. Until 2017, Tesla’s share price had been range bound principally between $200 and $250 per share since 2014. During that period, Baron Partners Fund purchased 1.1 million Tesla shares for an average cost of $213.35 per share. At the date of this letter, Tesla’s share price was above $300 per share.
Since 2013, Tesla has more than tripled its annual revenues to more than $7 billion. Demand for Tesla’s new and used Model S sedans and Model X crossover cars continue to exceed its production capacity and “for sale” used cars. Tesla’s $100,000 luxury “S” sedans and “X” crossovers already outsell Mercedes Benz’ luxury cars…even in Europe! While Tesla’s Models S and X represent about 8% of worldwide luxury car sales, luxury cars comprise less than 2% of worldwide automobile sales. We believe Tesla’s revenues will increase at an even faster rate following the introduction this summer of its mass market, $35,000, Model 3 sedan.
Tesla opened its first car assembly line in its Fremont, California plant in 2012. Tesla’s production capacity was then 1,000 cars per week. That year Tesla sold only 2,000 cars. In 2015, Tesla opened a second line in its Fremont factory, this one with the capacity to produce 3,000 Model “S” sedans and Model “X” crossover cars per week. In 2017 it sold 76,000 cars. In July 2017, Tesla plans to open its third production line in the Fremont facility. This line has planned capacity initially of 5,000 Model 3 cars per week which will eventually scale to 10,000 Model 3 cars per week.
Many investors worry about competition for Tesla from large, hundred year old automobile original equipment manufacturer (OEM) car makers. Those car companies have billions invested in plants that provide them with expertise and competitive advantage to make ICE cars (cars that use internal combustion engines instead of Tesla’s batteries). Those plants would become “stranded assets” if abandoned or converted to make electric cars. OEMs also have large, legacy, independent dealer networks reliant upon servicing cars with internal combustion engines. Electric cars need little servicing. Electric cars also don’t need gasoline and gasoline stations. Traditional ICE OEMs are also constrained by their entrenched legacy distribution channel that limits their abilities to offer services provided by Tesla’s efficient, direct to consumer sales organization.
General Motors (NYSE:GM) recently introduced Bolt, a compact, mass market, electric car. The Bolt is a necessity for GM to meet emission and mileage standards that will permit it to continue to sell its very profitable but low miles per gallon SUVs. GM has announced that it plans to sell 30,000 Bolt cars this year. It sold 3,000 in the first three months of 2017. Industry sources indicate Bolt sales have been disappointing and dealer inventories are high.
Tesla announced early last year that it would begin to manufacture and ship its Model 3 electric car in 2017. In the first six weeks following that announcement on May 18, 2015, Tesla received an astounding 373,000 orders for its Model 3! Customers placed those purchase orders with $1,000 deposits for a car buyers had never seen, had never sat in, had never driven and that would not be available for more than another year! We believe the reason for the enormous demand…with no advertising… is not just because the luxury Tesla S and X cars are beautiful, environmentally friendly, low maintenance and fun to drive. According to Department of Transportation statistics, Tesla cars are the safest cars ever made…and Tesla expects the Model 3 to be as praiseworthy.
Tesla has spent the past five years making substantial investments in infrastructure including hundreds of showrooms and maintenance facilities, thousands of charging stations, enormous battery and solar roof plants and a paint shop capable of painting 500,000 cars annually with capacity that can be doubled with modest additional investments.
I almost forgot. Panasonic is investing more than $1.5 billion in Tesla’s $5 billion Reno Giga battery factory, the same amount in an expansion of the Reno factory and has committed to make an additional $250-300 million investment in Tesla’s second Giga factory in Buffalo, New York. The Buffalo facility will produce solar roofs, a product about which we are also quite excited. We are also optimistic about Tesla batteries, its cars with autonomous driving capabilities, Tesla “mobility” services like Uber’s (Tesla could make your car available to others when you are not using it which will offset your car payments) and utility network services.
From Ron Baron (Trades, Portfolio)'s first quarter 2017 Baron Partners Fund commentary.
