Whether or not Tesla (TSLA 4.72%) exists in 10 years, the company has undeniably changed the landscape of the global auto industry. It's demonstrated that electric vehicles are the future: Consumers want them, and governments are willing to help them gain market share. Nearly every major automaker has plans to electrify at least part of its fleet in the coming years.
Then again, that may be the problem. Tesla has long been priced for perfection, as is common among story stocks, but reality may be catching up with the narrative. Manufacturing electric vehicles and energy storage devices at scale is difficult. Doing so profitably with almost no room for error? Most investors would rather not bet on things going so smoothly in the coming quarters.
Why you might ignore Tesla right now
If investors sat down and created a list of the pros and cons of investing in Tesla at current prices, then it might look something like this:
Pros: Model 3 production goes off without a hitch and the company is profitable and cash flow positive exiting 2018.
Cons: Nearly every other scenario.
Tesla is hell-bent on achieving profitable operations in the second half of 2018. Considering the manufacturer lost $771 million and posted negative cash flow of $277 million in the final quarter of 2017, there's a lot of ground to make up. That hints that the slightest delay, glitch, labor dispute, or unforeseen circumstance could devastate the $49 billion company's share price. Shareholders may have had a small taste of just such a scenario when the stock cratered at the end of March.
While investors can never underestimate the irrationality of Mr. Market, it's also worth considering what happens if Tesla succeeds. How much upside is left after the current $49 billion valuation (#famouslastwords)? It's not that the electric vehicle producer can't succeed, but I simply wouldn't feel comfortable buying shares at current prices, which I think are priced for perfection.
The good news is that investors looking for opportunities in the future of transportation and renewables have more options than Tesla. Two stocks to consider: niche auto parts supplier Gentex (GNTX 1.39%) and well-positioned solar component supplier SolarEdge Technologies (SEDG -0.86%).
Quietly dominating the global auto landscape
You may just find your next investing opportunity when glancing at Tesla in the rearview mirror -- literally. Gentex invented automatic dimming mirrors decades ago for luxury vehicles, but the technology has crept into standard models over the years. The company has cemented its dominance by developing additional technologies that are now commonplace, including buttons and displays on interior mirrors and blind spot warning systems on exterior mirrors.
I admit the business is not as sexy as a slick Tesla Model S or Model 3, but Gentex has quietly built a formidable business. In 2017 it sold 39.3 million units globally, good for an astonishing 93% global market share. The company delivered revenue of $1.8 billion at a 38.7% gross margin last year, allowing the parts supplier to generate $407 million in net income and $501 million in operating cash flow. Not many companies can convert 28% of revenue into cash flow.
That's impressive, and it's only getting better with time. Gentex has grown revenue 53%, net income 82%, and its dividend 39% from 2013 to 2017. That has handed shareholders total returns of 162% since the beginning of 2013 -- well ahead of the S&P 500's total return of 109%. And that includes a recent one-day drop of 7% following the release of its first-quarter 2018 earnings. Some investors may call that a great buying opportunity.
Exploiting solar's new business model
In a sign of a more robust technology ecosystem and the maturation of the solar industry at large, companies are beginning to specialize. For instance, First Solar is shedding the part of its business that designed power systems to focus almost exclusively on manufacturing solar panels by the gigawatt. That shift is possible in part because niche roles are increasingly being filled by newcomers such as SolarEdge Technologies.
The company manufactures direct current inverter systems that optimize the power produced from a solar panel array at the module level. The integrated systems are smaller than traditional inverters, require less wiring, and are continuously monitored in the cloud to further reduce maintenance requirements and costs. It's been a smashing success. SolarEdge Technologies only began selling commercial systems in 2010, but shipped 6.7 gigawatts of inverters through the end of last year comprising 22.7 million power optimizers and 950,000 inverters. Investors haven't seen anything yet.
Shares of SolarEdge Technologies have exploded higher in 2018 on the heels of strong guidance for the year ahead. Management expects first-quarter 2018 sales to reach $200 million to $210 million, representing a leap of 78% at the midpoint compared to the year-ago period. That eye-popping growth will occur at 36% to 38% gross margin, offering a rare combination of growth and profitability.
It's still too early to say when the pendulum will stop swinging for business model evolution in the solar industry. Other major panel manufacturers are still trying a more traditional (and vertically integrated) route, or at least betting that selling a home-grown storage option will boost the value provided by their products. Even in the scenario where companies look to go more vertical, SolarEdge Technologies would be a prime takeover candidate given its drop-in inverter systems that work for any solar modules. No matter what happens, at a market cap of just $2.5 billion investors should expect plenty of upside in the long-term.
Pass on Tesla at these lofty prices
Tesla has certainly proven many critics wrong over the years. It could do that once again in 2018 by hitting its production targets for the Model 3. However, a history of missing its lofty goals, and the reality that there's far less room for error today than ever before, will undoubtedly give investors pause before jumping into a position at current prices. Investors looking to build wealth in the auto industry and solar industry can find less risk in Gentex and SolarEdge Technologies.