Last week I wrote about Tesla Motors Inc., explaining why I see long-term value in the company’s shares. In short, I think the next two to three years of growth is already priced into the stock, but the real upside comes when (or if) this electric car maker grows to become the next BMW over the next decade. So far it’s been a very profitable investment, but that doesn’t guarantee it will continue to be.
This reminds me of an important and quite painful investing lesson I learned around the turn of the millennium. JDS Fitel was a fibre optics powerhouse based out of Ottawa. The story of Jozef Straus leading this company toward spectacular growth during the Internet boom is well known. The company went public in March of 1996, just a couple of months before I finished my engineering degree and took my very first professional job working for them. I worked for JDS for only one year, leaving behind some stock options to take a higher salary job at Nortel Networks.
I decided to invest in JDS stock to make up for the stock options I was leaving behind. As I remember, I invested about $6,000. This was a large bet for me as a 21-year-old since I’d just finished repaying my parents a few thousand dollars for helping me buy my first car, a used 1992 Eagle Vista hatchback.
To cut to the chase, JDS Fitel continued to soar. By the time I left Nortel to take my first job as an equity analyst at Yorkton Securities in Toronto, JDS Fitel had merged with Uniphase Corp. to become JDS Uniphase Corp. My shares had jumped to 40 times their initial value at their peak. Little did I know their peak had passed.
As a long-term investor, I knew the market had lofty expectations for JDS Uniphase, and I knew the stock could tumble 50 per cent on any hiccup. I was fine with this, knowing I’d ride through the bumps.
I remember golfing one morning with my friend Don, a savvy and successful investor with about 20 years of experience on me. He had recently traded his supply chain management job at JDS for semi-retirement. That morning, as we enjoyed a quiet round of golf, we discussed the valuation of JDS. Specifically, we did some back-of-the-napkin math to figure out what expectations were priced into the shares. We concluded that the company would need to grow revenue about 25 per cent annualized for the next 10 years to justify its current price.
Don sold his shares. I didn’t sell mine until my 40-bagger had declined by 90 per cent a few years later. My initial $6,000 was now only worth about $24,000. If all you knew about were the endpoints, you’d probably think I did great. But I could have done much better by selling when expectations were way out of hand.
Hindsight is 20-20, but there is a good lesson here. In the case of JDS, at the time, nobody was questioning the value of fibre optic technology and the fact that the Internet was growing enormously. If I’m going to invest in a long-term trend I want to do so knowing that the majority of other investors are not expecting the same kind of industry transition as I am. Fibre optics were already the obvious choice for ultra high-speed data transport. Holding the stock at that point became much more of an argument about growth rate and competitive dynamics. I didn’t have enough of an argument to bet that JDS could actually exceed 25-per-cent growth for the next 10 years. The technology was already quite mature.
Contrast the JDS situation circa 2000 with Tesla Motors today. Yes, it’s similar to JDS in that the stock has climbed significantly (though only eight times its IPO price). But it’s still technology where deployment is in its infancy and there are huge raging debates over whether electric cars are the future or just a fad. Most buyers today are not even thinking of electric cars. This leads to significant potential upside. Because if I’m right, and we discover that it’s not a fad, but a sea change in the whole industry, I’m invested exactly where I need to be.
The day that everyone accepts the future being one powered by electric cars … is probably the day that Tesla is no longer an interesting investment for me.