Every Stock Has a Story

By
Patrick A. Labbe, CFA

Tesla Motors is probably one of today’s most interesting public companies.  Whether it’s a story about the company itself or its charismatic founder and CEO, billionaire Elon Musk, Tesla is frequently in the public eye.  In April, Tesla announced that pre-orders for its newest electric sedan, the Model 3, were fast approaching 400,000.  Musk speculated that pre-orders might soon top 500,000.  That’s an impressive customer response, especially if your goal is to simultaneously reshape both the auto industry and battery technology.

Since going public in 2010, Tesla shares have been on quite a ride, increasing more than 16 times, to around $250 today.  Amid this dramatic rise, Tesla shares have experienced decreases of at least 27% every year since 2011 and declined about 36% during the February 2016 market slide before rebounding into positive territory.  That’s a lot of volatility, and I can’t help but wonder how many investors actually held on to enjoy the eventual 16-fold gain.  Looking at the business behind the shares, Tesla’s performance has been mixed.  On the one hand, Tesla has the ability to deliver an impressive vehicle (early models received rave reviews from Road & Track, Consumer Reports and others), and its battery technology is advanced enough to license to some competitors.  However, it has yet to report an annual profit under generally accepted accounting standards, and it appears to suffer many of the same problems as traditional automakers, such as recalls, production delays and vast capital requirements.  And like any large-scale manufacturer, Tesla will require high levels of factory utilization before achieving consistent profitability.  Perhaps the company’s widely-fluctuating operating results are at least partly responsible for the aforementioned stock volatility, as investors struggle to value the business.  Others may reach a different conclusion, but for me, Tesla’s future is simply too uncertain to reach the confidence needed for investing.

Still, Tesla is one of those stocks that can be hard for some investors not to own, since the press, television and even bloggers love to talk about it.  Some people might feel they’re missing out on something special if they aren’t Tesla shareholders.  It is a great story after all, full of high-tech glamour and transformative goals that anyone would applaud.  Given Tesla’s stock valuation, it appears the story is more important than actual profits, since investors are paying a great deal to participate in the future of the business.

Often these types of “story stocks” fail to live up to their perceived potential, though a few have gone on to great success.  Given its achievements to date, Tesla probably has more substance than many story-stock companies and certainly more than most internet-based story stocks responsible for inflating the dot-com bubble.  Tesla shares may offer the prospect of an exciting ride and a potentially exciting future; however, this brings to mind the words of legendary investor George Soros, who claimed, “Good investing is boring.”