Investing — Tesla — Elon Musk

Charging Ahead: My Decision to Invest in Tesla (TSLA)

Why Tesla’s Future is Bright (And Why I’m Betting on It)

Investiforum

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In this article, I discuss my recent decision to invest in Tesla stock, despite having some historical reservations and skepticism about the company. As a long-time follower of the technology industry, I have been wary of the hype surrounding Tesla and its founder, Elon Musk. However, after conducting thorough research and analysis, I ultimately decided to take the plunge and start a position in Tesla.

Here, I will lay out the reasons behind my decision, including my evaluation of the company’s financial performance, its potential for future growth, and its impact on the broader technology and automotive sectors. Despite my initial mistrust, I believe that Tesla has the potential to be a strong investment and a game changer in its respective industries.

Originally, this was a just an innocuous poll launched on my Twitter account this Tuesday.

Not such a trivial question, after all, because in addition to taking the pulse of my community, I had been watching the fall in the price of Tesla share (NASDAQ: TSLA) for a few weeks. Especially this Tuesday, the worst session in two years following a bad news flow:

Tesla price situation on January 4, 2023. Market cap is back to mid-2020 levels.

From there, and armed with a good dose of caffeine, I decided to scratch a little to see if maybe there was one shot to play on Tesla.

I first looked at competitive advantages, one of my favorite topics in fundamental analysis. Definitely some interesting things here! Tesla indeed has several competitive advantages that make it a strong company in the electric vehicle market.

First of all, the perception of the brand and its association with innovation. If I tell you “electric car”, you will surely think of Tesla, either directly or in the first brands that come to mind. The company is indeed closely associated with the concept of electric vehicles, and this is a big competitive advantage because you might more likely opt for its models. This is especially true if you’re from the US, where Tesla clearly leads the dance on this segment.

Tesla dominates the US electric vehicle market, outpacing the combined sales of the next 15 brands. Source: Counterpoint Global Passenger Vehicle Model Sales Tracker, Q3 2022

An advantage that pairs very well with a cult effect since Tesla has strong relationships with its customers. Let’s be honest: Elon Musk’s personality is no stranger to this. Anyway, current controversy around him being set aside, it allows the company to maintain high prices, high margins and strong customer loyalty. Does this remind you of Apple? Well, me too.

Another advantage concerns Tesla’s low-cost production, especially in the battery sector.

Tesla structural battery pack, a technological beauty.

The company has made significant advancements in battery technology, making them more efficient and economical than those of its competitors. It is clearly leader in this technological segment. And over time, the production lines (of batteries as well as cars) become more and more automated and efficient, which reduces the cost of production. Ultimately, as the cost of sale remains high, the margin increases.

Gross profit margins comparison between Tesla (red), Volkswagen (green) and Ford (blue), since 2010.

Finally, Tesla has a significant advantage in its charging network that is the most comprehensive and integrated network of charging stations of any automaker. This helps alleviate range anxiety for Tesla customers by providing more convenient charging options for their vehicles.

R&D expenses comparison between Tesla (red) and three other competitors in EV. Tesla invested $2.6 billion in fiscal year 2021.

In short, a lot of competitive advantages that intertwine to build strong moats against the competition. With a big plus: Tesla is becoming more efficient every day, which allowed and will allow to expand its range of products and lower prices. Ultimately, it will make life even more difficult for its potential competitors, either disruptive (like Polestar) or traditional (like Ford).

Source: InvestingDeck

From a fundamental perspective, the findings are more diverse. For example, on one hand, I calculated a very good Piotroski F-Score of seven on a scale of nine. That’s a sign of a high-value stock. Altman’s Z-Score is very high, no risk of bankruptcy on the horizon, helped by a comfortable financial mattress of 17 billion in cash and short-term investments. Difficulties encountered by the stock on markets are therefore not linked to a problem of liquidity or debt.

Overall, fundamentals are quite good!

But on the other hand, on the valuation side, troubles arise. Depending on the models, the action is either undervalued, correctly valued, or too expensive. In fact, it all depends on how we see growth in the next few years and what sales will be made of!

Indeed, Tesla not only sells EV, but also lease its cars, provides premium services, energy generation and storage equipment, etc. The company also wants to diversify itself by selling electric pickups, roadsters and semis. And maybe autonomous vehicles such as robo-taxis? For geeks, you can test the Tesla 2026 Valuation Model from Ark Invest on GitHub to do calculations based on various hypotheses.

From single to double….

In short, you will understand we are facing a two-choice situation:

  • Either we start on Tesla thinking that it’s an opportunity in terms of valuation. And we’re going frankly… Or smartly.
  • Either we consider that the growth projections are too optimistic. We adopt a conservative approach and pass.

With $5+ of earnings power still hittable and the stock in free fall, we do not believe now is the time to bail on the stock and view it is a way oversold on fears of the unknown are around the corner — Dan Ives from Wedbush Securities

I chose option 1, but smartly 😁 I opened a position in my speculative compartment and therefore of appropriate size compared to my overall portfolio. Better, I initiated the position in such a way as to underweight it to have a foothold in Tesla while leaving myself a margin of safety to strengthen it. Just in case the price were to drop significantly again…

We’ll see what’s going on when the next results come out in January!

Photo by Paul Steuber on Unsplash

I’m Raphaël, founder and editor-in-chief of Investiforum.fr, a financial website for French-speaking private investors. Thanks for reading! Don’t hesitate to follow me on Medium, Twitter or Polywork.

This article is for educational and entertainment purposes only and shouldn’t be considered as financial or legal advice. Not all information will be accurate, but all the data is sourced. Consult a professional before making any significant financial decisions. This article shouldn’t be seen as an incentive to buy or sell any of the securities mentioned therein, nor endorsement to any presented strategy. I own long position on TSLA and AAPL. Some links can be affiliated ones.

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Investiforum

Blogger at investiforum.fr (investing for french investors). I talk about investing, financials & money with a long term mindset.