Investors are always looking for the next big thing. What's the latest growth trend? Where will consumers spend their money over the next decade?
Electric vehicles may very well be one of the biggest growth trends over the next 10 years. And if any company is positioned to benefit from this trend, it's Tesla Motors (NASDAQ: TSLA ) . But does this probable development automatically make Tesla stock an excellent investment for your money? And is searching for the latest popular growth trend really the best way to find great investment opportunities?
In 2012, the electric-vehicle pessimists were prolific. In 2013, they may be fewer, but they are still beating their drum.
In the October 2012 presidential debate, Mitt Romney listed Tesla among the "losers" in green energy that the Obama administration supported with "breaks." Little did Romney know that less than a year later Tesla would repay its 2010 loan from the Department of Energy nine years early. The U.S. taxpayer came out with a nice $20 million profit on the deal.
In May, Audi voiced its concern with Tesla's success in a poorly drafted press release that overstated Tesla's sales by attributing the company's entire quarterly sales to just one month. The press release dogged a CNNMoney.com headline that read, "Tesla sales beating Mercedes, BMW, and Audi."
Talk about a dubious public-relations move -- the press release seemed to voice the company's concern with Tesla's apparent success more than anything. Unsurprisingly, the press release was removed later.
Then there is the legal battle in support of the franchise auto sales system to stop Tesla from selling its cars directly to consumers.
But despite the naysayers' grumbles, electric vehicles are here to stay. Even better, some manufacturers are posting mind-boggling sales gains, according Baum & Associates, Ford's electric-drive deliveries were 46,197 in the first half of 2013. Nissan's fully electric Leaf booked sales of 9,839, tripling its sales volume in the year-ago period. Overall, the report estimates that electric-drive sales are up about 27% on considerable volume of 299,000 in the first half of 2013 compared with the year-ago period.
And Tesla? Tesla's own premium battery-powered sedan may have sales of about 8,931 for the same period, according to an estimate by automotive consultancy Autodata. That's a big difference from the few hundred vehicles it delivered in the first half of 2012.
Having paid off its Department of Energy loan and gaining production efficiencies as the company benefits from scale advantages associated with higher sales volumes, Tesla is positioned to be a major competitor not just among electric vehicles, but in the luxury car market in general.
And talk of bankruptcy for Tesla is far in the past. To illustrate Tesla's strong financial position, consider Tesla's outlook for Q2: "We expect to be roughly breakeven on cash flow from operations in Q2, despite launch costs in Europe and a huge increase in service centers, stores, and Supercharger stations."
Electric vehicles and Tesla are undoubtedly riding a wave of success. Even better, electric vehicles could begin to gain mass market acceptance as early as three to five years from now.
Can you invest in this opportunity?
The question isn't about survival anymore. Electric vehicles will play a big role in the next decade. But it is in this obvious opportunity that there also lies several problems for investors.
First, electric vehicles represent a very small portion of total sales for the big auto companies like Ford and General Motors.
Second, if electric vehicles gain mass acceptance, big automobile manufacturers that manage to capture electric-vehicle demand may offset these gains with declines in sales of its traditional vehicles.
Finally, Tesla, arguably the only publicly traded company solely reliant on electric vehicle technology that is also financially stable, has massive growth already priced into the stock. At 15 times sales, compared with Ford at just about 0.5 times sales, opportunity is undoubtedly priced into Tesla's stock -- especially after the stock appreciated about 275% year to date.
What does all this mean for investors? The latest growth trend or fad isn't always a great investment opportunity. Valuation matters.
Does this mean it's time to sell Tesla? Not necessarily. But when the opportunity is already obvious, it may be too late to buy.
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