Bull and bear cases for investing in Tesla (or not)

Tesla is what stock market pundits call a “story stock.” But in fact, there’s more than one story here, and there are several very different reasons to invest, or not invest, in the innovative automaker. Some boosters want to be part of Elon Musk’s bold mission to change the world, while others simply see a company with meteoric growth and fanatical brand loyalty. Some skeptics point to the unlikelihood of a small startup scaling the auto industry’s proverbially punishing barriers to entry, while others just can’t get past Musk’s unconventional personality and snarky tweets.

Above: Professional money manager POVs on Tesla reflect a variety of differing outlooks on the company's future (Instagram: marysia_mendakiewicz)

At a recent roundtable of professional money managers convened by Fortune, several of these positive and negative stories were discussed. It’s interesting to see how different investors can see the same company in radically different lights, but it just goes to show that there’s more than one way to make money in the market - just as, as the world is learning, there’s more than one way to build cars.

Many believe that much of Tesla’s lofty stock market valuation has to do with its leading position in self-driving technology, which has the potential to revolutionize the world’s transportation systems. Catherine Wood, CEO of ARK Invest, a firm whose investments focus on “disruptive innovation,” sees Tesla as “primarily a mobility-as-a-service play” in the long run. “Right now, it’s selling for two times trailing revenues, so it’s valued at $45 billion vs. $20 billion in sales. Had Tesla remained private, it would have a much higher valuation.” 

For Lori Keith, Portfolio Manager at Parnassus Investments, which specializes in socially responsible investing, a company’s environmental benefits are important, but strong financials have to be there too. “For us, it’s really important to consider environmental, social, and governance [ESG] factors. We’ll never put capital to work in a company that has only a good fundamental story. By the same token, if it is only a positive ESG story without strong business fundamentals, that would not be a focus for us.”

Above: Fortune's roundtable of professional money managers discuss Tesla (Source: Fortune via Yahoo Finance)

Count Kate Warne, an Investment Strategist at Edward Jones, among the skeptics, at least for now. “We don’t follow Tesla. But part of the reason is, their debt’s junk rated. We wouldn’t look at it until it becomes investment grade. In general with companies, we’d look at the credit rating before we even look at other characteristics. We’d rather be later and not have quite as high returns but wait until the cash flows are more stable and bondholders can be a little more comfortable.”

Many in the staid realm of stock punditry are spooked by Elon Musk’s refusal to act like a typical pin-stripe-wearing, platitude-speaking CEO. ARK’s Catherine Wood, however, takes a long-term view. “What we’ve seen with visionary leaders leading innovation, whether it’s Jeff Bezos or Steve Jobs or Elon Musk, is behavior that is really born out of the frustration associated with short-term thinking in the equity markets. And they just don’t understand how we can’t understand.”

“If you look at the investment itself, what’s going to make Tesla move is a three-year lead in chip technology, battery technology, and data collection,” Wood continues. “And there’s also the concept that is going to get it catapulted into the world: mobility as a service, which many companies are just starting to think about.”

Above: Tesla's Model 3 (Image: Plug in America)

“The Tesla Model 3 is the number-one selling car in the United States if you measure by revenue,” says Wood. “Think about that. It’s never advertised. They’re doing something right.”


Written by: Charles Morris; Source: Fortune