Tesla sits at the middle of three major trends

We originally looked at Tesla (Nasdaq: TSLA) as a play on electric vehicles (which to some degree it is) but over time we realized that Tesla was much more than that. In addition to what we see as an attractive valuation there are a few themes that Tesla plays into:

Connected Car: The electronic content of automobiles has been on the rise for decades. Mechanical elements have been replaced by electronic and power-assisted components. Back in 1993 Cummins Engine was showing off one of their engines that had four intel processors in it. Those processors have proliferated and most cars have even had their own “local area network (LAN)” for years as well. Now cars are shifting into network-attached, processor intensive machines. They are or soon will be as connected as your iPhone. At the same time the last element of purely mechanical design, the drivetrain, is being replaces as well.

Design: It can be a frustratingly “soft” science (just ask Dell and Microsoft) but it is increasingly powerful. Consumers want inspired design and are willing to pay for it. There may be nothing as powerful for many consumers as their connection with their car. It is a visceral feeling that is attached to a high ticket purchase that requires substantial maintenance. Design has played a big role in automobiles with covered design names like Pininfarina. Conventional companies like Ferrari, Porsche, BMW and Mercedes all understand the importance of design in automobiles. Tesla is another one and they bring to it a more technology-focused approach to innovation. People love the design that Tesla brings to their cars and this is a powerful trend.

Performance EV: There are no shortage of doubters and detractors around electronic vehicles. Range anxiety is real, cost is an issue, grid readiness matters, but most of these pertain to mainstream and mid-market adoption. A Ferrari isn’t practical for most of the people that own one but that wasn’t part of their decision process. Lower ticket items like the “weekend convertible” or motorcycle fall into the same category. The truth is that electric vehicles offer much better performance and handling than conventional drivetrains. If you think about it for one moment the ability to power each wheel separately gives car designers a whole new frontier. Many investors think about an EV as a glorified golf cart. They obviously have never driven a Tesla.

Given that Tesla sits at the intersection of three important trends in emerging technology it is a perfect candidate for our portfolio. With an IV of $55 the shares offer substantial upside. We do note that much of the intrinsic value for Tesla is “back end loaded” which means it really begins to kick in after 2015. So the shares may ebb and flow with investor sentiment. Armed with our IV we will be in the market to keep positioned accordingly.

 

Comments

  1. Frank J Perruccio says:

    I agree. Tesla will continue to inovate.

    One reason that legacy automakers have been slow to embrace EVs is the very disturbing fact that they stand to lose enormous profits on parts sales. EVs simply will not have as many parts to fail. Car companied are not anxious to see that cash cow go away.

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