Have You Seen This Car?
I gotta start today's article with a disclaimer: I don't really follow Tesla (NASDAQ: TSLA).
Yes, I have the stock quote on my screen of stocks to watch. I read the articles about the various missteps, and I will say it's pretty surprising sometimes. Tesla misses production goals regularly. And not just by a couple cars here and there. Tesla's misses tend to number in the thousands.
Like back in April, Tesla was expecting to roll 2,500 Model 3s off the line. The actual number was 2,020, nearly 20% less than expected. Now, the Model 3 was the cheap one. At $35K, it was supposed to be a mass-market car, the one that tipped the balance for electric car sales in the U.S. But Tesla couldn't meet that pricing goal. Instead, that mass-market car will run you $44K.
Look, I get it. Taking a company that has never produced a car before and making it a success is a big task. Ford's been making cars for nearly 100 years, and it still screws it up sometimes. So I'm not here to bust Elon Musk's balls because it hasn't been a straight line to amazing success for Tesla...
Clearly, I'm not alone. At ~$50 billion, the market says Tesla is more valuable than Ford and about the same as General Motors. This despite the fact that Tesla sells a fraction of the cars that the Big Three do. And despite the fact that Tesla isn't profitable (though it has reported a quarterly profit and is expected to be profitable in fiscal 2019).
The market is even taking an optimistic view of the fact that Tesla has just $3 billion in cash and has to drop nearly one-third of its cash to pay off a $920 million bond on March 1st...
The Tipping Point to a Massive Market
Investors are sometimes pretty forgiving with growth stocks. So I'm not totally surprised that Tesla gets away with some of this. The global electric vehicle market will be huge.
Tesla is basically the first to market with the Model S. And I gotta say, I will forever be impressed with Musk's insight that the first round of electric cars should not be mass marketed. Rather, they are luxury items. Therefore, production numbers don't have be huge, and the sticker price actually should be.
The market is well aware that there is a very big shift underway in the oil and auto markets. The two are inextricably linked because cars use +70% of the oil that comes out of the ground. You'll notice that oil prices remain stuck in the mid-$50s. You should also notice that Ford and GM are seeing their sales get crushed so badly in China that they are pulling back on current production. A cursory glance at China might suggest that people are spending less on cars because the Chinese economy is slowing down. But that's not really it...
The reality is that Ford shares are at 10-year lows because Ford depends on China for growth, and sales of internal combustion engine cars are falling. Electric vehicle sales are rising in China.
This is a tipping point. For the last decade, virtually all demand growth for oil has come from Asia. That's now done. At best, we're going to see Chinese sales of gasoline-powered cars plateau. More likely they continue to decline as electric car sales continue to gain momentum.
Electric cars are where the growth is. And if you ask me, that's why the market is being so forgiving with Tesla.
Right now, Tesla has a forward P/E of about 45. Surprised? It's OK, I was surprised, too. It's now possible to think that Tesla could actually be making some pretty good money in a few years.
Now, this brings me to my next question. Because to this point, it's really been Tesla's market. The Volt and the Leaf or whatever haven't really been competition at all. So...
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Have You Seen This Car?
This is the Porsche Taycan:
Yeah. Looks pretty nice. And it's rumored to cost around $85,000. You think Porsche is going after the Tesla Model S sales? Ummm... yeeeaaahhh.
Porsche is expecting to sell out of the 40,000 Taycans it will build this year. I haven't seen the numbers for the 2020 model, but it seems reasonable that it will build more. And think: Porsche doesn't have to build out the whole infrastructure for this new car. Most of the processes are already in place. Which means Porsche can most likely ramp production more efficiently than Tesla can.
And this Porsche isn't the only new electric car coming out this year. Audi, Mini, and Mercedes-Benz will debut electric cars this year. And there's another round of those BMW i3s coming, along with a Nissan Leaf minivan.
In other words, this is the year Tesla will face real competition. Could be a problem.
Now, Tesla has been on my "do not trade" list for a couple years. Because I know a cult stock when I see one. I can't tell you how many times I've heard the Tesla bears say, "That's it, it's all over," and then the stock rallies 20% and crushes them. But the time is coming when one of those "that's it" sell-offs is for real.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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