Streetwise for Sunday, April 30, 2017
During several recent speaking engagements, I was asked repeatedly whether I would invest in today’s market, given its exuberance. The funny thing is I am asked that question whether the market is rising or falling. At the risk of raising the ire of market timers, there is no bad time to invest. In other words, the time to invest is now.
Investment opportunities abound in any market. However, to seize an said opportunity requires that you do more than just research out possible investment candidates. It requires a willingness on your part to make your own decisions with a sense of confidence.
Confidence is having what it takes to stay the course despite the consternation of others. To paraphrase a line from a Rudyard Kipling poem, you need to keep your head when all around you are losing theirs.
And I cannot think of a better example of company whose leader is the essence of self-confidence than Tesla (TSLA) and its president Elon Musk. Although Musk may have as many detractors as fans, I would bet that from Musk’s perspective, he would view it as, “when all around you are losing theirs.”
So, what is attractive about a company with no earnings, high capital needs, with a degree of potential failure built in? To put it simply, Musk is a technological evangelist with the ability to make things happen that others just talk about.
Today, Tesla addresses two relatively small segments of the automobile market with its premium sedan and SUV. However, with the Model 3, along with a planned for compact SUV and a revolutionary pickup truck, Tesla’s footprint in the automobile marketplace should increase dramatically.
To ensure a sustainable future for Tesla, one of Musk’s key objectives is to accelerate the process of scaling up production volume. Therefore, Tesla engineering has transitioned to focusing heavily on designing the machine that makes the machine, i.e., turning the factory itself into a product.
For example, one of the first principles of automotive production physics says that a 5 to 10-fold improvement in production is achievable by version 3.0 of a factory, based on a 2-year iteration cycle. According to Musk, the first Model 3 factory will be a version 0.5, with version 1.0 by 2018.
To further elucidate Musk’s forward thinking about factory production, consider that automobile manufacturers test a new model’s production line by building vehicles with relatively cheap, prototype tools designed to be scrapped once they deliver doors that fit, body panels with the right shape and dashboards that do not have gaps.
Musk is skipping that so-called soft tools approach, replacing it with computer simulation, and initially ordering the more expensive permanent tooling. One reason is a self-imposed deadline of September for volume production of the Model 3 sedan.
Musk’s management style underscore both his tolerance for risk and his willingness to forego industry norms. While Tesla is not the first automaker to try to accelerate production on the factory floor, no rival has Musk’s fortitude to go where others fear to tread.
Musk expects the Model 3 rollout to help Tesla deliver five times its current annual sales volume, a key target in the automaker’s efforts to stop burning through available cash.
Wall Street is already counting on Tesla’s a successful mass producer of automobiles, as demonstrated by the company’s rising share price. However, with the financial pressures facing Tesla, the faster Musk can deliver the Model 3 with its estimated $35,000 base price to the 373,000 customers who have put down a $1000 deposit, the sooner Tesla can capture $13 billion in sales.
While Tesla has yet to turn a profit, Musk was nonetheless able to raise $1.2 billion in fresh capital last March. He also sold a five per cent stake to the Chinese internet company Tencent Holdings.
Tesla’s earnings per share in 2016 was a negative $2.87. My earnings estimate for 2017, is that while the red ink may not disappear, it is likely to be reduced substantially, or could even turn positive. Meanwhile, my projected 12-month share price is $345.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.