Yesterday, Tesla reported some blowout numbers that easily beat analyst’s estimates. Gorden Lam, one of my managers, has been the most consistently right about Tesla since he first bought it $196 in March 2016 when Goldman Sachs and UBS said to sell. Gorden’s Tesla position is up over 50% in a little more than two years, but he expects much more to come.
Ken Kam: Gorden, Tesla reported a profit of more than $300 million for the quarter when the consensus estimate was for a loss. A lot of people think Musk is playing with the numbers. What do you think of Tesla’s numbers?
Gorden Lam: I think these numbers look very positive going forward, but I’m still a little cautious on the sustainability of profit.
The success of the Model 3 creates a large revenue stream to help Tesla stay operational. The fact that the higher-end, pricier models were sold first, created some healthy profits for the quarter, but as Tesla starts to produce the Model 3 base models that start at $35,000, I think we will see some of that profit margin diminish.
It’s not to say that Tesla can’t be profitable, but those higher margins we are currently seeing would need to come from another source other than the Model 3 base model that is sold in the U.S.
Kam: So you don’t think Tesla’s profitability is sustainable?
Lam: I never really expected short-term profitability for the company. However, creating a car for the masses such as the Model 3 will fuel many other future opportunities for the company and is critical for long-term success.
Kam: Critics argue that the Federal Tax Credit is the main reason why Tesla has become the best selling car in the U.S. Is there any truth to that?
Lam: Some analysts anticipate a significant slowdown in sales after the tax credit is eliminated. However, I think most people on the waiting list for a Model 3 anticipated that the federal credit would most likely have been phased out by the time they’ve taken delivery of their Model 3 at the end of 2018 or sometime in 2019.
Kam: Another reason people think Tesla’s sales will slow down is that a lot of competition is on the way. What do you think of Tesla’s competitors?
Lam: There has been a lot of news lately for new electric vehicles coming to the market and there is a lot of hype about these so-called “Tesla Killers” that will crush Tesla and put Tesla out of business. From what I can see so far, no company has come close to accomplishing that.
Tesla currently owns 90% of the EV market in the U.S. There are new companies showing off their concept electric cars touting that they will outperform Tesla with better battery technology and longer driving range, but so far many of these concept vehicles are simply just that, “concepts!” Some of these companies are still looking for funding and have not produced a single vehicle yet.
The current competing EVs that are actually on the market and with performance numbers that look great on paper have not sold well lately in the U.S.
Kam: Can you be more specific?
Lam: The Chevy Bolt, GM’s 100% electric vehicle has a range of 238 miles and priced around $37,000, is aimed to compete directly with the Model 3. Sales of the Bolt plunged 40% in the month of September, while the Model 3 was the fifth best selling car right behind the Toyota Camry & Corolla and Honda Civic & Accord.
Kam: Five years ago, Citron Research said they were short Tesla because they expected there to be a lot more competition than Tesla has faced so far. Why has the competition been so slow to develop?
Lam: It’s easy to forget the immense infrastructure Tesla had to invest in to support the many EVs on the road. The Gigafactory, which produces a large number of batteries for those EVs and what about the Super Charging Stations? We’re talking over 10,000 charging stations worldwide and counting with six new stations built every week.
Kam: So aside from producing an electric car, a real competitor would have to find a source of batteries and set up recharging stations across the country. What can Tesla do to accelerate the market’s transition from gas powered cars to electric cars?
Lam: Tesla recently revealed that the Model 3 not only received a 5-star safety rating in each of its categories but called it the safest car ever tested by the NHTSA and having the lowest probability of injury of any vehicle. The top three spots are all owned by Teslas with Model S in second and Model X ranked third in safety.
Being designed as one of the safest vehicles on the planet creates an additional niche for both premium and non-premium buyers making the Model 3 a truly mainstream vehicle. Thus, it would even open up the door for non-electric car buyers looking for the safest vehicles for their families. That’s how Volvo carved a niche for themselves with its emphasis on safety.
My Take: One of the great things about investing discussions, as opposed to political discussions, is that over time facts emerge that prove one right or wrong.
I give Citron Research, a firm that shorted Tesla five years ago, a lot of credit for changing their mind when it became clear that the scenario they bet on was not happening. Closing their short position before Tesla’s earnings came out yesterday, saved their investors a lot of money.
But, Citron Research was not the only firm that shorted Tesla. As of October 15, more than 34 million shares of Tesla were sold short. The other short sellers will have to cover their positions at higher prices. Game theory teaches us that in situations where the first one out pays the smallest penalty, there will be a rush for the exits. That is what’s called a “short squeeze.”
To minimize their losses, I expect a lot of short-sellers and market pundits are going to be reaching for reasons to justify why they are still right to be negative on Tesla. For example, I can’t wait to hear how Bob Lutz explains his September 18th view that Tesla is headed for the graveyard now that Tesla is profitable. The short-sellers will be out in force to try to keep Tesla stock from rising much until they can cover.
In the coming days, we are going to hear a lot from analysts who have been largely wrong about Tesla for a long time.
If you are long Tesla, don’t let the onslaught of negative articles panic you into selling. Just remember, they have been wrong for the past five years, and they are probably wrong now. In fact, if you don’t own Tesla, I would use any weakness caused by negative articles in the next couple of weeks to buy. If you start to go wobbly on Tesla, reading Citron’s latest letter should give you confidence to hang on.
A great manager is not someone who never makes a mistake. You can make lots of mistakes and still deliver excellent returns as long as you are more right than wrong.
Great managers let their winners run even in the face of massive negative press coverage while also admitting their mistakes early so they can cut their losses off while they are small when facts emerge that contradict them.
Gorden Lam has an 11+ year track record at Marketocracy which encompasses one market crash and many corrections. Over that time he has averaged 11.37% a year which compares nicely to the S&P 500′s 7.86% return for the same period.
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