A Tesla S electric car and a charging station at the North American International Auto Show in Detroit in January, 2014.REBECCA COOK/Reuters
Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
Although you may think of yourself as a long-term investor, do you act like one? Do you share the mindset of a businessperson with a long-term objective? Last week's second-quarter financial report by Tesla Motors Inc., a stock I own personally and in my Strategy Lab portfolio, serves as a great example to discuss. The electric car maker's quarter was by no means perfect. Not surprisingly, Wall Street punished the stock significantly. Tesla shares dropped from about $270 last Wednesday, before the numbers were released, to $242 by last Friday's close.
Here's the thing: I actually expect stuff like this to happen regularly. I expect my stocks to nosedive regularly, but to recover and reach new highs as the business continues to drive down that highway of growth. Every single big winner I've owned has had multiple, significant drops. I don't forecast them, but I do expect them.
The core philosophy of a long-term investor should be to buy great companies with great management teams. We expect greatness, but certainly not perfection. Reed Hastings and the team at Netflix Inc. are admired for what they've accomplished in streaming video. But they've missed guidance and made mistakes in the past. So has Apple Inc., or any other great company. Rather than panic over a disappointment, we are better served by evaluating the progress of the business.
In the case of Tesla Motors, chief executive officer Elon Musk and his team have accomplished incredible feats in the car business. They introduced the award-winning Model S sedan and built their own network of stores and service centres and even a global network of supercharger stations. Two years ago there were a handful of superchargers in the United States, while today there are nearly 500 in North America, Europe and China. I can take my car on trips without worrying where I'll charge. Tesla has become one of the biggest buyers of lithium ion batteries in the world and is building the world's largest battery-manufacturing operation in Nevada. By the end of September, the company should also have shipped its new electric SUV, the Model X, to some lucky customers. By any measure, this is incredible progress.
But short-term thinkers are upset. Tesla reduced guidance for the number of cars it will deliver to customers this year. The old estimate of 55,000 was cut to a range of 50,000 to 55,000 because introducing the Model X is complicated. They need to buy thousands of separate parts from suppliers and have everything ready to ramp up production in the fourth quarter.
Mr. Musk is taking a lot of heat for delays in launching this new vehicle. And it's true that he's probably guilty of being too optimistic in the short term. I'm okay with that. If I was worried about perfect execution, I'd never own any stocks. If Tesla manages to get the Model X into production in the fourth quarter, it will still be a huge win in my book. Having a premium SUV on top of the Model S sedan should double demand for the company's vehicles.
Some investors are also nervous that Tesla is running out of cash. The business was cash-flow break-even from operations in the second quarter, after adjusting for lease and financing accounting. But it has a cash balance of only $1.2-billion and plans to spend another $700-million on capital equipment over the rest of this year, plus it has to finance the production startup of the new SUV. It's easy to see how some investors worry that Tesla needs to raise more money.
I don't worry about it. I expect it. An equity financing, and the dilution it brings, represents the cost of doing business in a high growth, capital-intensive industry. As a consumer, you get what you pay for. As a business owner, you get what you invest in. If Tesla is to continue increasing production, building superchargers and constructing the world's largest battery factory to support rapid growth, then raising money is the smart thing to do. When the market assigns a company the kind of market capitalization that Tesla has (about $30-billion), it is essentially saying,"We believe in you, and we're giving you the currency to go out and make things happen." Tesla doesn't have to raise money. It has the luxury of being able to raise money to grow faster.
Growth investing, especially in the technology sector, is never very predictable in the short term. You must assume there will be big bumps in the road ahead and laugh when you actually run into them. I can't predict where Tesla will go next week, next month or even next year. But if it continues to execute as it has so far, I remain quite bullish about the future valuation of the stock.
Disclosure: I own Tesla shares both personally and in my Strategy Lab portfolio.
Chris Umiastowski