Could Tesla and SolarCity Doubters Be Right After All?

It is human nature to doubt new things. New things are often created by de novo companies with no discernible competitive advantages. These are the companies founded by people with wild hair and wilder ideas. Start-ups face competition with orders of magnitude more resources, experience, and connections.

Due to those factors, it is very normal for investors to doubt the up-and-comers. There are virtually no successful technology companies today that haven't had their doubters at times. Google was said to be just a feature, not a product. Amazon was just an online book seller. 

When viewed through that lense, SolarCity (NASDAQ: SCTY  ) and Tesla (NASDAQ: TSLA  ) are not out of the ordinary.

The two companies have their doubters as well. Shorts currently make up more than one in five SolarCity shares and one in three Tesla shares.

The doubters have been proved wrong so far in light of the rallies both stocks have experienced -- but whether the doubters will be wrong in the long term is an extremely contentious debate.

A tale of two different philosophies
There is one school of thought, mainly held by venture capitalists and growth investors, that believes investing successfully is all about focusing on the quality of the product, the size of the potential market, and the character of the leaders. Those investors are not as concerned about the competition because they believe if one just focuses on the road ahead rather than worrying about the competition, they will do just fine. As long as companies can innovate and lead the way, there is no reason to fear the competition that is always one step behind.

The other school of thought, mainly held by more conservative investors, puts more emphasis on quality of competition, probability of success based on historical analogies, and growth-adjusted valuation numbers.

Not surprisingly, Tesla and SolarCity shares show the tension between the two schools of thought. The venture-capital-minded investors are mainly long, while the more conservative investors are mainly short. 

Good reasons for both sides
There are good reasons behind both views. That is, after all, what makes a market. 

Tesla does have a great product. The Model S was given the 2013 Motor Trend Car of the Year award, and users rave about how well the car handles. It's a huge market as well. The global car and automobile market is a $4 trillion a year market. 

SolarCity has an equally great product. The company essentially offers cheaper electricity than utilities while saving the environment. The utlility market is also huge. U.S. power utilities sell $400 billion in electricity every year. 

Elon Musk, who is chairman of SolarCity and CEO of Tesla, is the proverbial Thomas Edison of our time. The two companies are still growing at extremely fast clips.

On the other side, the shorts think the valuations are absurd. The stocks are rallying in what has generally been a bull market, and the two companies have good stories to tell. Part of the reason the advances have been so extreme is that both are crowded with short trades, creating a short squeeze.

The two companies also still depend on generous government subsidies. Some shorts think that when the established car companies get their EV game on, it will be game over for Tesla. 

The bottom line
I believe a significant portion of the float of both stocks is made up of momentum investors that could go one way or the other. The momentum investors are the proverbial sharks following the sheep: They will leave at the first sign of trouble. Whether that trouble will come is still up for debate.

The success of the companies depends on how fast battery technology advances and how generous the government subsidies will be down the road. Those factors, and the ultimate success of both companies, are unknowns today. Another critical ingredient for success is the public perception of Elon Musk and his projects. On that count, Mr. Musk and his two companies are doing just fine. 

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 06, 2014, at 3:40 PM, LoveMyTesla wrote:

    Sadly, I sold my TSLA at $92 only tripling my money!! I just bought back in knowing that the potential in China and Europe will be tremendous....as well as continued growth here in the US.

    Tesla has a 3 year jump on competition, so I don't expect anything will hamper the sales of the Model S. I'm sure competition will be heavy by the time Tesla gets their lower end car ready for production, but the benefit to that car will be the network of Super Chargers!

    These guys are executing their plan almost perfectly.

  • Report this Comment On February 06, 2014, at 4:02 PM, ffbj wrote:

    I think short squeezes rely heavily on the stubborn human trait of not wanting to be wrong. Certainly not admitting defeat, for instance, when defeat meant death, enslavement, great loss. Those who were persistently stubborn survived against tremendous odds. Despite the plagues of the four horsemen, representations of the ills which beset mankind, we still persist. So certain traits are selected for because they help us survive, at times in the face of tremendous odds against that eventuality. Even altruism has been shown to be a survival strategy, for despite the survival of the fittest, indicating personal individual survival, survival of the group is more important.

    Howsoever in the case of the stocks the stubbornness trait can lead huge losses. It can be really difficult to go against our strong inborn natural inclinations, which have been selected for us, admit we were wrong and take our losses.

  • Report this Comment On February 06, 2014, at 4:15 PM, SteveTG3 wrote:

    ffbj,

    well said. I can tell you that the first day or two after the third Tesla fire, I was about 80% sure it wouldn't be an issue. when the thought occurred to me that I was long too many shares considering the 20% risk I estimted at the time that this might be the tip of a big problem, I felt a tense "then I'll go down with this ship" visceral response. I did not lighten my position at all. it worked out in this instance, but it was not skillful decision making (I am working on this :)

  • Report this Comment On February 06, 2014, at 4:20 PM, countrarian wrote:

    "Elon Musk, who is chairman of SolarCity and CEO of Tesla, is the proverbial Thomas Edison of our time."

    Did I miss the part when Elon Musk actually invented (vs. marketed) something?

    As opposed to over 1,000 patents and numerous life changing inventions for Edison.

  • Report this Comment On February 06, 2014, at 4:50 PM, Capt601 wrote:

    until car manufacturers stop producing ICE cars, they will only be dabbling into EV's and Tesla will still have a tremendous advantage. Every benefit of an EV is a downfall of an ICE car.

    and more importantly, will other car companiues invest in a supercharger network like Tesla? not a chance. The supercharger network is the key to Teslas success, without them, it is simply a local ( or city) car.

    the dealers are the other issue. they do not want EV's as the lack of maintenance needed. and maintenance is where they make there money, and scam consumers.

  • Report this Comment On February 06, 2014, at 5:00 PM, weaponz wrote:

    The thing about competition is, it depends on timing. The timing is definitely in Tesla's favor from the looks of things. If the competition comes in at the right time, Tesla would actually benefit. Especially if the market turns over. Think of it like when people had feature phones and switched to smartphones, suddenly all those people who has feature phones became a potential market. Same thing, a turn over to EVs would leave billions of gas cars around the world in need of replacing with electric.

    @countrarian - Edison was not really an inventor, but a businessman. He invented a few things but overall most of the stuff he is known for he did not invent. For one, many people think he invented the lightbulb but in reality he didn't. He just marketed it.

    I am sure Musk has many patents on his name as well.

  • Report this Comment On February 06, 2014, at 9:53 PM, wiserinvestor wrote:

    Consumers are not stupid. They're quickly learning that they can purchase a solar system and keep the financial incentives for themselves for 1/3 the cost of a $0 down solar lease.

    $0 down solar leases and PPAs might have made sense 5 years ago when no other financing existed, but today there are several $0 down loan options that offer tax deductible interest and are easier to qualify for than leases.

    As the news of the much lower pricing and better financing options permeates the public mindset, the market for solar leases and PPAs will evaporate.

  • Report this Comment On February 07, 2014, at 12:37 AM, fernyo5455 wrote:

    I'm very happy with my lease, I pay 94.00 dollars a month for 20 years , the solar company can remove these off my roof , because after 25 years these panels are worstless. my electric bill was 200.00 dollars a month during hot summer months now my EDISON bill is one dollar and 50 cents

  • Report this Comment On February 07, 2014, at 9:36 AM, PanzerWatts wrote:

    "@countrarian - Edison was not really an inventor, but a businessman. He invented a few things but overall most of the stuff he is known for he did not invent. For one, many people think he invented the lightbulb but in reality he didn't. He just marketed it."

    That's just completely wrong. Edison most emphatically was an inventor. The most prolific in recorded history. Many of his patents he invented purely by his self and then later far more as the head of a dedicated team.

    I recommend you read a biography of Edison, or catch the excellent 1940 movie starring Spencer Tracy, 'Edison, the Man', on TMC.

  • Report this Comment On February 07, 2014, at 9:39 AM, james18322 wrote:

    @fernyo5455, where are you geographically?

  • Report this Comment On February 07, 2014, at 7:15 PM, BillMarshall995 wrote:

    The entire bottom of a tesla is a sheetcake of batteries that when dented can short out and catch fire. Musk trying to cpomparte his fires to all the cars on the road today (1968 doge darts?) is a joke. he needs to compare it to other 2012 luxury cars that catch fire when they run over something in the road. All that it will take for the shorts to succeed is for a Tesla owner to run over something in the road, drive home park the car in the garage and have his mansion with grandma and the baby burn at two am when the short finally catches fire and burns the house down.

    If that doesn't happen then the 10 other manufacturers who can (and will) replicate this car and take a loss on it to steal marketshare will cause his stock price to fall to earth and a reasonable PE and that will be more than enough to enrich the shorts.

    And lastly, those who think this car doesn't need maintainance are dreaming. Most repairs on new cars are not oil changes and sparkplugs, they are electrical issues with astronomical costs. Since the dealers are all factory owned Musk has a service monopoly for at least another few years .

    This stock will never grow into its current share price, at least not from any justifiable point of view.

  • Report this Comment On February 07, 2014, at 7:22 PM, Mega wrote:

    "The momentum investors are the proverbial sharks following the sheep"

    I must have missed that proverb.

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