I acquired my first Tesla shares in November 2018 at just over $68 per share. Someone recently told me they believe I only invested in Tesla stock because I had a fear-of-missing-out component (FOMO) to my decision, and that “I wanted Elon Musk to be correct.” When I initially purchased Tesla shares, the company had been a public entity for over eight years, already selling electric vehicles (EVs) for several years. In late 2018 when I purchased Tesla, the share price already had increased 58% from the beginning of 2017. Prior to 2018, I assumed Tesla at most would be a small player in the automotive space with no significant capability to disrupt the industry. During that period when I purchased Tesla, many experts were warning that the company was significantly overvalued (particularly those experts who closely follow the automotive category). So why did I decide to purchase the stock in 2018? And why do I still own a significant allocation across my individual stock portfolio?
My Three ‘Aha’ Tesla Moments
At the end of the 2016 calendar year, Tesla sold just under 27,000 vehicles in the U.S. for the full year. In 2017, the company launched a vehicle that would hint at the beginning of a massive disruption period for the automotive industry. That car was the introduction of the Model 3 in July 2017. By the end of 2018 (the year I acquired Tesla shares in November), Tesla EV sales in the U.S. grew 574% to 182,000 total vehicles, with Model 3 representing 76% of those sales.
The Model 3 represented my first ‘Aha’ moment about Tesla. Model 3 proved to me that Tesla had developed the competence to design, develop, manufacture, market, and sell a high volume EV. Until then, no other automaker had shown that it could (or would) develop, produce and sell a high volume EV. As I’ll explain later, producing and selling high volume cars for a new category like EVs is very significant because it allows a company to scale. Model 3 was the first sign that Tesla knew how to scale.
My 2nd Tesla ‘Aha’ moment was the introduction of the company’s second volume electric vehicle - the Model Y, introduced in March 2020. Model Y has proven to be even more popular than Model 3. The powerful ‘one-two’ punch of those two vehicles drove Tesla sales to nearly 1 million vehicles globally in 2021, with 93% of those sales being the sale of Model 3 and Model Y vehicles. Massive sales growth drives economies of scale for an automaker. Rapid scaling drives rapid efficiencies, particularly for auto companies producing EVs with new expensive technologies like battery packs. The fact that Tesla learned to scale helped drive its automotive gross profit margin to 28% (2021 third quarter), which is now the envy of every other volume automaker in the world.
My third ‘Aha’ moment occurred during Tesla’s Battery Day presentation in September 2020. The most significant part of Battery Day had nothing to do with Tesla EV battery technology. The most important part of Battery Day was when Elon Musk said, “the ability to dramatically scale manufacturing capacity will separate the electric vehicle winners from the losers.” Musk went on to describe how factory volumetric efficiency and faster production speed within the factory are critical to driving down costs. These statements occurred during a period when many considered Tesla’s manufacturing capability to be its competitive disadvantage, which is why Musk’s comments were insightful to me. This indicated that Musk was committed to scaling faster and in more unique ways than any other company in the space (legacy automaker or new entrant).
This third ‘Aha’ moment about manufacturing core competence was tested during the automotive supply chain challenges caused by the pandemic. While other global automakers were severely constricted in their ability to procure components and produce vehicles, Tesla actually grew its global vehicle deliveries by 87% in 2021. How did the company manage this? Essentially its because the company is much more vertically integrated than other automakers. An example of this is how Tesla was able to utilize alternative chips because the company was able to quickly modify circuit boards of their own design. Vertical integration and supply chain management are just two examples of capabilities that are part of Tesla manufacturing core competencies important for scaling.
Today, Tesla comprises over 18% of my taGMan portfolio - the highest allocation of any stock in the portfolio. In 2021, I sold some Tesla shares in an effort to rebalance taGMan. However, there are two primary reasons why I continue to hold on to Tesla shares.
I believe global EV adoption will continue to accelerate, driven by increased consumer acceptance and global government mandates. With that primary belief, I recognize that Tesla continues to scale better than all others. Its EV sales are scaling. Its revenue is scaling. Its costs are declining, while its margins are growing.
Successful companies are driven by impactful leadership. I believe in a Charlie Munger answer to a question posed to him about Elon Musk. “Never underestimate the man who overestimates himself.” Most of Musk’s pronouncements about what Tesla would accomplish have come true during a time when lots of “experts” insisted that many of these Musk goals were impossible. In fact Musk continues to make bold, future claims that I often find difficult to imagine. However, I’ve learned not to quickly dismiss these Musk goals. I now try to imagine the impact on Tesla’s business if these goals are accomplished, while assuming these Musk goals might be accomplished later than he states.
What I’m Reading, Watching, and Hearing
Disclaimer
TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors may occur.