Why We Don’t Own Tesla Stock (and no, we’re not bears)

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If you had put a gun to my head a few months ago and asked me, “Long or short Tesla?” I’d have said short. Today, I’d ask you to gently put the gun away, get a glass of wine, slide into a very comfortable chair, and read my 37-page opus on Tesla. After reading this Tesla mini-book, some readers have painted me as an enthusiastic bull, some as a bear, and some as an undecided observer.

Although I am a very enthusiastic Tesla Model 3 owner, as you are about to see, I can see both sides of the argument equally (more on “equally” later). This makes me neither bull nor bear but someone who can foresee distinctly different paths for Tesla the company and Tesla the stock.

Neither my company nor I are long or short Tesla shares. Why don’t we own it? Tesla stock violates the 4th commandment of value investing: It doesn’t have any margin of safety (what are the Six Commandments of Value Investing? You can receive them in your inbox with one click here). Also, Tesla, despite many positives, does not meet the threshold of a high-quality company (at least not at this stage of its life).

Let me explain.

Unlike internal-combustion-engine (ICE) car producers, Tesla is vertically integrated; thus it is not just a designer, assembler, and marketer of cars, it also manufactures most of the parts (including the battery and self-driving CPU) that go into its cars, and it also owns the retail stores that sell Tesla vehicles to consumers (unlike ICE carmakers, it doesn’t wholesale cars to dealerships). This path, though potentially more rewarding and maybe even necessary, is both difficult and risky.

This business model creates very high fixed costs and thus requires a higher escape velocity (number of cars produced) to reach profitability. To make things more difficult, Tesla is still young for a car company, and excellence in car production comes from iteration. Tesla’s production techniques are still improving.