Companies like Tesla Motors (TSLA 3.91%) can be difficult to evaluate. With Tesla shares increasing well over 300% in 2013, to a $20 billion valuation, you may think the stock has seen its best days. My thinking shifted, however, after the company released exceptional preliminary figures for its fourth-quarter results. Tesla reported that it sold and delivered 20% more vehicles than it had projected for the quarter.
The 7 reasons
My reasoning behind investing in Tesla -- and why I think the stock will continue to be a great investment over the long haul -- can be summed up by seven key points:
1. Elon Musk is arguably one of the most visionary individuals on the planet. Not only that, but he is a gifted scientist and proven entrepreneur with an incredibly innovative mind. Musk owns over 20% of Tesla, so his money is where his mouth is. No one is more invested in the idea of Tesla (or the business) than Musk himself.
2. 2014 marks Tesla's 11th year of existence. Tesla has only produced two vehicle models thus far: the Roadster and the Model S. Yet, even so, Tesla has already produced a vehicle considered superior to every other vehicle on the road (electric or otherwise). Consumer Reports gave the Model S its highest rating among all tested vehicles in 2013, and the Model S enjoys a five-star safety rating as well. If Tesla can produce a vehicle like that within 11 years, I have high hopes for the company's future innovations.
3. Demand for Tesla's vehicles outpaces what Tesla can supply, without a dime going to marketing. Plus, Tesla has managed to increase its production capacity each quarter to meet rising demand. Look for this to continue as the Model X is released later this year.
4. Tesla's rapidly expanding Supercharger network eliminates one of the primary preconceived problems with owning electric vehicles: convenience (specifically with charging the batteries). A father-daughter duo were recently the first drive across the U.S. "fueling up" only at Tesla Supercharger stations. Avid Tesla owners -- including Musk -- are planning the same trek this year. The Supercharger networks are rolling out in the U.S., Europe, and soon in China. In other words, it is becoming increasingly convenient to own a Tesla vehicle.
5. Traditional automakers (Toyota, Ford, General Motors, etc.) have never competed with anyone like Tesla. Tesla is approaching automotive design, production, and distribution in an entirely new fashion compared to the industry stalwarts. I believe this gives Tesla a significant competitive advantage that is often overlooked.
Not only is Tesla already producing a superior product, it is producing and distributing its vehicles in a manner completely foreign to what automakers are accustomed to. Take a peak into a Tesla factory to see how unique Tesla's production process really is. Tesla sells vehicles directly to the public through its own stores and the Internet, rather than relying on dealerships like traditional automakers.
Tesla's Supercharger network, already functioning (and quickly expanding) across many corners of the world, gives the company a leg up on competition. No other business has anything near Tesla's proven, established, and expanding infrastructure for electric vehicles.
6. Demand outpaces supply for Tesla's $70,000 Model S. Imagine what this will look like with the $35,000 Model E in 2017. Tesla is currently in the process of developing a "Giga Factory" to mass-produce batteries for the Model E, which Musk anticipates to be the largest battery factory in the world. Seems like Tesla's innovation timeline is right on schedule.
7. Tesla is producing increasingly affordable electric vehicles that are perhaps even more convenient (and reliable) than gasoline or hybrid vehicles. Tesla is truly aiming to transform the automotive industry, and it has a pretty convincing road map for how that transformation will occur.
Foolish bottom line
So, with all that said, I felt comfortable starting a position in January. It can be discouraging to invest in a business whose stock has seen already seen incredible returns, but Tesla has hardly scratched its future potential. The stock is undoubtedly priced at a premium with a P/S of 13 and a forward P/E of nearly 300 based on analyst estimates, but Tesla's performance proves why the stock should be trading for a premium. If Mr. Market changes his mind and wallops the stock, great; I would welcome the opportunity to add to my position at more reasonable levels.
Tesla has a lot riding on its future performance to continue its record as a market-beating investment. However, if you are confident that Musk and company can continue to execute as well as they have over the past several years, it may be sensible to open a position at today's levels. The stock will be volatile going forward, but I believe Tesla (the company and the stock) will prove to be a winner over the long haul.
