This energy episode of Industry Focus takes a look at one of the most prolific and revolutionary figures in energy today: Tesla (NASDAQ:TSLA) founder and CEO Elon Musk. Listen in to find out why billionaire hedge fund manager Ron Baron took such a bullish stance on Tesla last week, how the release of a Chinese copycat car will affect the company, and why you should get excited about Musk's aerospace and space transport company, SpaceX.
Also, host Sean O'Reilly and energy analyst Taylor Muckerman look at why Saudi Arabia is cutting its oil prices for Europe and the Mediterranean, and what it'll mean for the economies involved.
A full transcript follows the video.
This podcast was recorded on June 9, 2016.
Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, June 9, 2016, so we're talking about energy, materials, and industrials. I'm joined by Motley Fool analyst and Fool Canada head Taylor Muckerman. What's going on, Taylor?
Taylor Muckerman: Just enjoying some iced coffee on a hot day.
O'Reilly: I was about to say, "Oh, you're fancying it up there..."
Muckerman: Hot decaf coffee.
O'Reilly: Oh, yeah. There is a time and a place for decaf coffee and it is never and in the trash.
Muckerman: I thought you were just going to say before noon but OK.
O'Reilly: No, it is definitely not. I think it's un-American to drink decaf. I think you're a monster.
Muckerman: Well, I'm the head of Canada, so...
O'Reilly: Oh, God. Here we go. Geez.
Muckerman: Maybe we don't need as much caffeine up there.
O'Reilly: When was the last time you visited Canada?
Muckerman: I went up there Halloween of last year for a Money show event.
O'Reilly: That could be fun.
Muckerman: It was good. I went to a Maple Leafs hockey game.
O'Reilly: Oh, boy. Do they dress up like we do?
Muckerman: The crowd was all in costume, yes.
O'Reilly: Oh, my gosh. That's awesome.
Muckerman: A lot of Wayne and Garths dressed up as hockey players. It's a totally different atmosphere, though. They take hockey very seriously up there, so rather than like the raucous Caps atmosphere, everyone is there aggressively criticizing the play rather than just cheering for goals and players.
O'Reilly: Why is there a lot of hockey stuff in Wayne's World? Is it just 'cause Mike Myers is Canadian or what?
Muckerman: I think so, yeah.
O'Reilly: Just teasing. Anyway. When was the last time he had a good movie?
Muckerman: Off the top of my head, it is probably an Austin Powers.
O'Reilly: The first Austin Powers, as the third one was terrible. Anyway. OK. We swear we're going to talk about energy and materials and industrials at some point. Before we dive into what amounts to basically an Elon Musk Day, we do need to talk about OPEC really quick again. You sent this article over to me from The Wall Street Journal. Basically, Saudi Arabia is cutting prices for its customers in Europe and along the Mediterranean. Don't get confused, though, because it's actually not by a lot. It could be a lot depending on who you talk to.
Muckerman: If you're talking about the 800,000 barrels a day that they ship there, $0.35 a barrel, it's a lot of money.
O'Reilly: A lot of money, yeah. Basically, they're cutting prices by $0.35 per barrel to Europe and $0.10 per barrel elsewhere on the Mediterranean. They basically did this right after that OPEC meeting where Iran was like, "Yeah, no. We're not cutting. We want to increase our own production a lot."
Muckerman: Pretty much, yeah. They'd cut prices once last year as well.
O'Reilly: That was mostly to Asia...
Muckerman: Yeah, so they're thinking about or they are going to hike prices a little bit to Asia, cutting prices to Europe. I think in large part that's because right now Iran is shipping about 400,000 barrels a day to Europe. Their target is around 700,000 barrels a day by the end of the year. Whereas Saudi Arabia shipped 800,000 barrels a day last year on average to Europe. They're probably nervous a little bit that if Iran does get that 300,000 barrel increase that they're looking for, where's that going to come from? Is it coming from the Saudi Arabia supply or somewhere else? Saudi Arabia is trying to go ahead and nip that in the bud before it actually comes to a head.
O'Reilly: This lends credence to that... I don't want to call it a conspiracy theory, but the theory of a year and a half ago that Saudi Arabia... I'm sure they're not upset that U.S. shale's hurting, but we weren't the actual target. It was Iran and Russia with their refusal to cut production.
Muckerman: That could certainly be so. You just start to see the geopolitical power of oil in instances like this. Obviously, Saudi Arabia being predominantly Sunni, and Iran...
O'Reilly: Sunni and Shia.
O'Reilly: Bottom line. Saudi Arabia and Iran hate each other.
Muckerman: The still waters run deep here. This isn't something that is strictly oil-based. Iran thinks they have the upper hand because they believe their government is less reliant on oil revenue than Saudi Arabia. It's no secret that Saudi Arabia is trying to reduce their reliance on that through some...
O'Reilly: What was Iran producing before the embargoes of the early 2010s? It was like 3 million barrels a day or something, right?
Muckerman: It was a pretty substantial amount. I don't have the exact number off the top of my head, but...
O'Reilly: Right. It was in the millions, right?
Muckerman: It's meaningful. It was one of the larger producers in the world. When you see them not nearly as worried about their budgets being reliant on oil, they think that they can live in a low-oil-price environment longer. A) Because they haven't had oil exports in some years and b) because of that, they had to reduce their reliance on oil revenue. Then Saudi Arabia talking about the possible IPO of a portion of Saudi Aramco. They're really banking on...
O'Reilly: That's still so funny.
Muckerman: ...billions, possible trillions of dollars from that. If Iran can keep oil prices low up until that date, Aramco might not be worth as much and either Saudi Arabia will have to postpone the IPO or just take a lower price and suck it up.
O'Reilly: Anyway. Why can't we all just get along?
Muckerman: Oil is not strictly supply and demand.
O'Reilly: It is not strictly economics, and that's the bottom line here.
O'Reilly: It is political. It is nation-state-y. It is, yeah.
Muckerman: You're seeing Canada production hurt from the wildfires. You're seeing Libya and Nigeria production being hurt due to insurgency...
Muckerman: ...and theft. Yeah, a general unrest, which is a common theme in the Middle East over the last five to 10 years, if not forever.
O'Reilly: That's what was amazing to me last year in the spring when oil went down to $27 a barrel. It was pricing in no unrest, no trouble on planet Earth at all.
Muckerman: At all.
O'Reilly: Yeah, anyway. Moving on to our first Elon Musk-based story. China has rolled out, by its Quinto Motors -- and I totally butchered that and I'm very sorry, but it's Q-U-I-N-T-O, Quinto, Quinta, I don't know [Editor's note: Qiantu]. They came out with their own Tesla-type car. It's $106,000. K50 is the model name, and it is built out of carbon fiber for its body and it has an aluminum frame. That sounds fast to me.
Muckerman: It sounds fast and light and strong. Tesla's not a carbon-fiber body but an aluminum frame just like that. This is one of the reasons why Tesla didn't originally sell in China, because they didn't want...
O'Reilly: All of the competition.
Muckerman: ...the copycats to come right out. I mean, China is not shy about it. We saw a couple weeks ago an apparel company by the name of Uncle Martian came out with a nearly identical logo to Under Armour, a nearly identical product lineup.
O'Reilly: It's like that fake Apple store that was in China.
Muckerman: Yeah, yeah, absolutely. You're seeing this in all industries. You're seeing it in the defense industry, the automotive industry, the apparel industry.
O'Reilly: What is not cheap about this car, though, is the price tag.
Muckerman: Yeah, what did you say? 150...
O'Reilly: Yeah, $106,000. It's ironic to me because I saw this article right after I saw that Tesla was coming out with some slightly cheaper models of the Model S and it's the Model S 60 and the S 60D, and those start at $66,000. I don't want to throw that around like we can all afford it or anything, but $66,000 versus $106,000...
Muckerman: It's five figures versus six figures. That's kind of the sweet spot right there in the middle of the new Model 3, which is going to be right around 35, and the creme de la creme Model S, which is over $100,000 -- this is their model. They had the coupe that they sold for well over $100,000. Then they came out with the Model S. Then they came out with the SUV. Then they're coming out with the Model 3. Already the prototype's out there. Over 400,000 pre-orders, which is well above their ability to produce an annual amount of cars, though they're shooting for 500,000 per year by 2018, brought forward from 2020. They're feeling it right now. They're in the groove. I don't think that a copycat is going to come along and just be able to catch stride.
O'Reilly: You sound almost as bullish as our next little story that we've got to talk about, which is billionaire hedge fund manager Ron Baron coming out and on CNBC saying he is so excited about Tesla. He thinks it's going to be worth in 10 or 20 years $700 billion, so it will be Apple-sized. Did you watch the interview?
Muckerman: I did not. I did read the article.
O'Reilly: Here's a little bit of background. Mr. Baron manages $26 billion. He himself is worth $2 billion. He also happens to have a lovely $100 million home in the Hamptons. In the interview on CNBC he says he actually visits Tesla's factory once every three months and he talks about how efficient they're getting and how good they're getting and all the stuff. Part of his major bull case was he thinks they can sell just as much in batteries as they will in cars to other companies...
Muckerman: Yeah. He did mention the Gigafactory, a $5 billion mega battery factory. It's a partnership with Panasonic. That's just one other reason to believe in this company. The factory, I want to say it's either officially open or the official open of it is pretty soon. [Editor's note: The Gigafactory is reportedly set to open at the end of July.]
O'Reilly: My understanding is like it's a fourth open.
Muckerman: Yeah, yeah. Official, not 100% capacity, but yeah, it's not a joke anymore.
O'Reilly: The bottom line in the end of the conversation and going back to the [Qiantu] Motors K50, Baron said that he's betting on Musk and the 16,000 employees at Tesla, is what he said.
Muckerman: Not only in Musk but his hiring practices and, yeah.
O'Reilly: They're all awesome and he just said Musk is too far ahead. Competitors could have caught him five or six years ago, but he is too far ahead now.
O'Reilly: Actually, whenever I see a competitor come out with another electric car that looks kind of like Tesla and I looked at the K50 and it's actually a very sleek-looking car. I'm like, where are you going to get all your batteries?
Muckerman: Well, you know, they do produce some batteries in China.
O'Reilly: I know, but...
O'Reilly: There's a reason Musk is building the Gigafactory, though.
Muckerman: Yeah, he wants to vertically integrate that and with SolarCity (NASDAQ:SCTY), they plan on using those batteries to harness solar power, store solar power, which has been the big holdup for residential use and also commercial use, because once it's created, if it's not used, it dissipates for the most part.
Once you can store it consistently and efficiently, he's got a pretty well-rounded core of companies there with Tesla, a battery factory, SolarCity. This Baron guy, Ron Baron, he has apparently about a $300 million stake. It could be $6 to $7 billion.
O'Reilly: He says he's only allowed to go up to 1.5% of assets for an individual investment because he said he would like to do more.
Muckerman: Yeah, yeah. It's pretty good, though.
O'Reilly: He's like, "Yeah, I think we'll make about $6 or $7 billion on this. I'm like, "Oh my gosh."
Muckerman: That's in the next 10 to 20 years. That's a pretty good return on your investment.
O'Reilly: He's very much like a Buffett-type long-term investor. He's owned Under Armour and made a ton of money on that company for like... I think he's owned them since the early 2000s or something. His bull thesis seems to imply a lot of optionality, which it kind of reminded me of how David Gardner, Fool co-founder and Chief Rule Breaker David Gardner, thinks about things. He likes companies with optionality that can do other things than if they're just committed to one set product. I don't know if Tesla starts doing the battery thing or they start making electric buses and giving them to cities or something crazy like that.
Muckerman: They're not going to give them to cities.
O'Reilly: Well, no. They'll charge them.
Muckerman: They'll definitely market it.
O'Reilly: Yeah, fine. Moving on to Musk's other pet project that is not public although...
Muckerman: There's just no small...
O'Reilly: No small...
Muckerman: No small feat over here.
O'Reilly: Not a big deal. Did you see his tweet the other day after...
Muckerman: I did not. I do follow him but I don't know what your reference is.
O'Reilly: Elon Musk, if you're listening, I did tweet a reply to your tweet.
Muckerman: Oh, that is a retweet of a Fool article.
O'Reilly: No. I love, I hoarded that or whatever you call it.
Muckerman: Yeah, you liked it.
O'Reilly: Yeah. That was a really good article by Evan Niu. No, Elon Musk met with the Pentagon a week ago or this week.
Muckerman: He met with the head of defense.
O'Reilly: It was just about security supposedly or something, but he made an Iron Man joke. Why not?
Muckerman: The character was loosely based on him. He got called in to like...
O'Reilly: He's an Iron Man, too, but there was this article that came out and it was just like, "What was Elon Musk talking to the Pentagon about?" And there was a question mark. Then Musk tweeted the article and just said something about a giant metal suit.
Muckerman: Right, right, yeah.
O'Reilly: I was just like, you know, why not...
Muckerman: Have some fun with it.
O'Reilly: Yeah. I said I see what you did there, ha, ha, #realTonyStark or something.
Muckerman: They're trying to bring more technology into the defense sector. When you think about it if you're SpaceX or if you're Elon Musk...
O'Reilly: It's a big customer.
Muckerman: That's not the worst thing in the world when you look at how the defense budgets have affected the likes of Boeing, Lockheed Martin, Northrop Grumman, and the list goes on. You see SpaceX stealing contracts, splitting contracts now with Boeing and their United, what is it, their ULA, the United Launch Alliance they have with Lockheed Martin.
They're already starting to pimp some contracts that are several hundred million dollars up to billions of dollars, and they seem to be ahead of schedule compared to Boeing on some things. If they can make some serious inroads into the space budgets of the Air Force, who they've been working with pretty consistently lately, watch out. This could be a massive privately held company.
O'Reilly: Really the question for this segment that I wanted to ask is: Would you buy into a SpaceX IPO? And without looking and using the Internet or anything, immediately I'm just like, well, no. I saw on CNBC when... Was it SpaceX had its IPO? I'm sorry, not SpaceX. Tesla had its IPO or was it just a secondary offering. I saw an interview with Mr. Musk on CNBC and he said that we aren't IPOing SpaceX because Wall Street is very short-term focused, and this is a multidecade thing.
Muckerman: Yeah, absolutely. He needed to go public with SolarCity and Tesla in order to fund this whole... You're not going to get government funding for automobiles or solar. You're going to get subsidies, but he's getting revenue from the government.
O'Reilly: Yeah, not only that, but during the financial crisis, NASA saved SpaceX. It was like the last hour he couldn't make payroll. NASA called and...
Muckerman: Yeah, Christmas.
O'Reilly: Yeah, and they're like, yeah, we're going to give you a billion dollars and he's like, "I love you all!"
Muckerman: He had a couple failed launches in the South Pacific at some secret test facility and they're running dry.
O'Reilly: I have one of those, too. I have a secret test facility.
Muckerman: Yeah, a secret test facility. A pretty interesting story, though, how it all came together, and it just shows you the resolve of Elon Musk because he was putting his own capital up, fundraising, paying paychecks out of his own pocket to his employees, and then, yeah, he got a couple contracts at the 11th hour.
O'Reilly: This is the reason I was bullish. I learned this after only Googling because at first glance, well, I don't want to own something for 30 years that may or may not pay off and we're just spending all this money to go to Mars. What's going on here? They currently have... This is a revenue-generating business already.
Muckerman: The Mars thing is the end goal, but he's making money now shipping people to space.
O'Reilly: Right, and it's awesome. He's got a $1.6 billion contract with NASA to supply the International Space Station. That's just fine. They just raised a billion dollars from Google and Fidelity. Fun fact: if you want to invest in SpaceX, those are the only two ways that I could find to do it. Google, which it's got so much other stuff.
Muckerman: You invest in everything when you invest in Google.
O'Reilly: Yeah, exactly. You invest in the future of mankind.
Muckerman: Yeah, literally. When people ask me how I'm going to feel when I'm 80, I don't know. Google's going to fix my body before I'm 80.
O'Reilly: Right. It'll be fine. Fidelity actually dropped their small investment. It was in the millions. It wasn't huge. They dropped it to a few of their funds. It was like a fraction of a percent. I don't think this is the way to do it, but that was interesting to me. He's talking about launching hundreds of little satellites to provide Internet to everybody, which is, of course, why Google invested. He thinks that would cost $10 billion. Do you think this is... Is it like buying stock in the Mayflower 400 years ago? I don't even... Like, what is this?
Muckerman: If I didn't have to deal with all the IPO shenanigans of Wall Street pricing and early investors and everything, if it was in a vacuum, I would absolutely invest in it.
O'Reilly: It's currently valued at $12 billion. You think the discounted future cash flows of SpaceX are worth more than $12 billion?
Muckerman: Yeah. I don't have my 10-tab spreadsheet in front of me calculating the...
O'Reilly: Get to work on that.
Muckerman: Yeah, yeah, absolutely. Just the simple fact that they've already gotten so many big contracts from the U.S. government and they're set to reuse... If you haven't seen a video of the landing...
O'Reilly: It is so cool.
Muckerman: The rocket...
O'Reilly: Have you seen the sped-up one?
Muckerman: Yeah, it's out of control. If you haven't seen a video of them landing the Falcon 9 rocket on a barge in the middle of the ocean after reentering orbit... Standing straight up and down.
O'Reilly: You see, because it's really funny, because it lands and then those little booster things at the top shoot off the sides as a finale.
Muckerman: Yeah, it's just like, it's like the last fire.
O'Reilly: Do you do that as a firework thing? What are you...?
Muckerman: They have cameras on it on different parts of it so you can see from different angles. It's pretty impressive. When you look at Jeff Bezos and his Blue, Blue Orchid...
O'Reilly: Blue Origin.
Muckerman: ... Orbit, Blue Origin.
O'Reilly: Did you call it Blue Orchid?
Muckerman: Yeah, Blue Origin.
O'Reilly: I know what I'm calling my SpaceX...
Muckerman: Yeah, Blue Origin. He didn't go nearly as high or go off trajectory nearly as much. They did land the rocket first, but Elon Musk's has been much more technically difficult.
O'Reilly: Bezos' didn't go up nearly as far or anything.
Muckerman: No, not even close. It could never in its state have delivered any payload to the Space Station, carried any humans. One day, I don't doubt it but in the current state, the simple fact that he got it done first shouldn't detract from the fact that Elon Musk has now done it multiple times with much more technical difficulties. Technical difficulties that I don't even understand but I know that it is, just based on what I've read.
O'Reilly: Did you see what Bezos tweeted after Musk stuck the first landing on the Falcon 9?
Muckerman: I did not.
O'Reilly: He's like, "Welcome to the club" or something.
Muckerman: Well, it's the new billionaire playground.
O'Reilly: The final frontier.
Muckerman: Yeah, Bezos believes we're going to move heavy industry into space because the solar energy is so much more powerful. Obviously, you're closer to the sun. You don't have the ozone layer to deal with, and then the U.S. will just be residential and light industry. Not the U.S. but the Earth.
O'Reilly: The Earth, yeah. For investors, if you want to get in on any of this, it seems like really the only option you have is Tesla.
Muckerman: Yeah, and you see, I don't know the exact web, but I do know that in the early days of all three of these companies, they each helped finance each other in certain ways. I don't know if either Tesla or SolarCity owns shares or debt of SpaceX, but I know that SpaceX has given money to SolarCity in the form of debt, which the government was like, "We don't know if we want our money going to SolarCity," but they can't regulate that. They are still kind of tied together. Not just the fact that Musk is CEO or chairman of all of them. [Editor's note: Musk is CEO of Tesla and SpaceX, and chairman of SolarCity. In 2016, SpaceX bought millions in SolarCity bonds.]
O'Reilly: Cool. All right. Well, that's it for The Musk Day. Have a good one, Taylor.
Muckerman: Yeah, you, too.
O'Reilly: Have a good one. That is it for us, folks, and if you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at email@example.com. Once again, that's firstname.lastname@example.org. As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly. Thanks for listening and Fool on!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Alphabet (C shares), SolarCity, Tesla Motors, and Under Armour (A Shares). The Motley Fool owns shares of and recommends Alphabet (A and C shares), Apple, SolarCity, Tesla Motors, and Under Armour (A Shares). The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.