Will Tesla Be The Next Apple?
"Buy Tesla's Car, Not Its Stock." That was the headline I used for my column in this space earlier this year. A lot has happened since at Tesla Motors (TLSA) and Tesla CEO Elon Musk's world, characterized by its variegated projects, including space rockets and autonomous electric cars. And by now Tesla Motors has attracted not only electric-car aficionados but people who have become passionate believers in Tesla founder Musk's innovative ideas.
One of them is Graham Tanaka, founder and chief investment Officer of the TANAKA Growth Fund, who bought not only a Tesla Model X car but loaded up on Tesla shares. TANAKA Growth Fund isn't one of those run-of-the-mill funds: It was ranked No. 3 by Lipper in the Multi-Cap Growth category, and was up 12.2 percent last year, versus S&P 500's 1.4 percent. In the past five years through Sept.30, 2016, TANAKA Fund generated annal returns of 14.9 percent versus 16.3 percent by the S&P 500.
Tanaka believes the stock has become even more undervalued at its current price of $196 a share. True, Tesla has had a record of missing quarterly delivery, sales and earnings expectations, which has hurt its equity valuation. But that's over, as far as Tanaka is concerned.
He argues that Tesla's third-quarter results showing it delivered 24,500 units that doubled year-ago levels and beat estimates by 10-15 percent "may be ushering in a new era of meeting or besting expectations."
But so far, Wall Street isn't convinced. So there hasn't been a preponderance of buy recommendations from the Street's equity analysts. Even so, Tanaka insists that analysts are underestimating Tesla's assets and potential, convinced that Tesla has "turned the corner" on production, although expectations are still low, as reflected, he notes, in the short position of 31 percent of the float.
The "value intangibles"in Tesla will become more apparent when the Model 3 cars ship in late 2017 at a more moderate base price of $35,000. So in the next three to four quarters before the Model 3 debuts, says Tanaka, "we expect quarterly deliveries and revenues will continue to exceed expectations."
Tanaka is encouraged by several developments: The "strong demand for the refreshed Model S, apparent optimizing and ramping up of Model X production, and construction of the proprietary Gigafactory for battery production that's progressing ahead of schedule." Moreover, Tanaka believes the company's announcement that the lower-priced Model 3 design has been finalized is a big positive for the brand.
So in Tanaka's analysis, Tesla is a real opportunistic buy. "Finding companies that can surprise on the upside after several quarters of missed expectations has traditionally delivered favorable results," argues Tanaka, who holds huge expectations for Tesla's future despite the stock's weakness.
Now down from its 52-week high of $269.34 a share, Tesla could be "the next Apple," asserts Tanaka, which has appreciated some 30% per year in price over the last eight years. He predicts Tesla achieving the same heights of glory.
Tanaka suggests that "Tesla can become and perform like Apple over the next eight years for some of the same reasons that helped Apple rocket to phenomenal success." Here's why Tanaka thinks so:
(1) Tesla is delivering refreshing products that delight its customers by using new methods and technologies to deliver better performing, better looking, and easier-to-use products.
(2) Like Apple, Tesla sells its products through its own showrooms, which not only reduces selling and distribution costs but also moves Tesla closer to its customers.
(3) Apple updates its products and operating system software every year, but Tesla upgrades its products even more frequently with free "Over the Air" software enhancements to improve the performance and value of its products. Tesla customers know this which is another reason they are willing to pay a premium for the Model S and Model X —and why demand for Tesla will continue to surprise auto industry experts and analysts.
(4) And like Apple eight years ago, Tesla has an opportunity to grow at a high double-digit rate for several years, as it was early in addressing a very large multi-billion dollar global market which it could penetrate and expand by adding new categories. As consumers get increasingly aware of "Tesla's higher safety, greater convenience, pleasure to drive, reduction of carbon pollution, and expectation of future product enhancements, it should drive double-digit growth in demand well into the next decade," says Tanaka.
But Tanaka hastens to add that Tesla is also "different from Apple" in certain ways:
(1). Unlike Apple, Tesla manufactures its own products. "We believe that Tesla's future growth will be gated more by how quickly it can ramp production than the rate of growth in demand." argues Tanaka.
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