Today I'm adding shares of electric car maker Tesla Motors Inc. to my Strategy Lab portfolio. In August of this year, when the stock had crossed $150 (U.S.) – almost three times what I had paid for it in my personal portfolio – I wrote a column arguing that the shares still had tremendous long-term potential but would likely exhibit a lot of volatility.
So far I've been right about the volatility. It remains to be seen if my long-term call on the stock will prove to be correct. Through the end of August the stock continued its ascent, reaching nearly $170. As September rolled by, it crossed $190. At that point, the company – which, remember, had shipped only about 20,000 Model S electric sedans – had a market capitalization of almost $24-billion, which struck some people as way too much, way too soon.
Just as the weather in Canada started to cool off, so did Tesla's stock. October wasn't so bad, but it feels as if we've hit the deep freeze in November with the stock price dropping down to almost $120.
My opinion hasn't budged, though. True, the stock has become cheaper, but I believe the business is even stronger. I'm more confident in the long-term opportunity, and that's why I'm taking advantage of the discounted shares.
The price drop this month is worth looking at a bit more closely.
The company's most recent financial results were one drag on the stock. Wall Street didn't like the outlook the company provided for its fourth quarter – but the reason for this is that many of the cars Tesla produces in the quarter will be on ships making their way across the ocean to European customers. These cars will have already been sold, but can't count as revenue until they are delivered.
This is hardly a business issue, but it causes analysts to revise their models lower, reducing near-term earnings expectations and killing stock momentum.
Wall Street also didn't like hearing that limited supplies of battery cells remain the key constraint barring Tesla from producing more cars. In the short term, this is the kind of thing that has momentum investors steering for the exit ramp.
But in the longer term, I don't think battery cell production will be an issue. Put the issue in perspective: Tesla is doing practically no advertising and is still unable to produce all the cars that its customers want to buy. Meanwhile, it has signed a deal to buy 1.8 billion battery cells from Panasonic over the next four years. By my math, that's enough for more than a quarter million cars.
I expect Tesla to be able to sell 100,000 luxury sedans and SUVs per year within two to three years. Beyond this, Tesla is reportedly mulling a partnership with at least one battery supplier to build what it calls a "giga factory" to supply enough cells to build hundreds of thousands of vehicles per year.
Not only could this result in tremendous growth for Tesla, but it may give the company an even larger competitive lead on battery pricing, which remains the most significant factor in the cost of electric cars.
Even without taking into account the company's plans for a third-generation vehicle, which will compete with vehicles such as the BMW 3-series, I think Tesla has earnings power of $8 to $10 per share in fiscal 2016. If I'm right, we're paying only 13 times earnings for that possible earnings scenario three years from now; the big gains would come if Tesla succeeds on its plans to roll out a mass-market third-generation vehicle.
Is the stock still risky? Of course. From headlines about car fires to global production issues, Tesla is a young company in the early stages of growth. But to me, this is what makes the story exciting. And considering the excellent customer satisfaction and safety scores achieved so far by Tesla, I'm betting the company can deliver market beating results.
Since my model portfolio is almost fully invested, I'm parting with 15 more shares of Netflix to raise the cash to buy 43 Tesla shares. (Given the structure of the Strategy Lab portfolios, I can't add a new stock unless I sell something.)
Selling a small chunk of my Netflix position lets me take advantage of the sale price on Tesla while achieving a better balance in the overall portfolio.