“Five Times More Profitable Than Apple with Zero Competition”

What's the "Top Stock of the Month" from Cabot?

By Travis Johnson, Stock Gumshoe, February 5, 2015

This article first ran on September 15, 2014, when almost exactly the same ad was sent around teasing Cabot’s September “Stock of the Month” …

… now, in February, they’re just calling it the “Top Stock of the Month.” Not much in the ad has changed, and the stock is about 10% cheaper now than it was in mid-September. We’ve kept the original comments and discussion at the end of this article, so you can add to that if you like.

What follows has not been updated, edited or revised since 9/15/2014… enjoy!

Does that headline sound familiar? If you’ve been treading the boards here at the Gumshoe Theater for a couple months or more, then it might well — the folks at the Cabot Stock of the Month Report used almost the same headline to tout their last idea.

Which isn’t to say that they’re still pushing the same idea — last time it was “Seven Times More Profitable Than Apple with Zero Competition” and the teaser pitch was for their August stock of the month, which happened to be the restaurant supply company Middleby (MIDD). A fine stock that’s had a spectacular decade.

This time it is, naturally, the September stock of the month — this one also has “zero competition,” we’re told, but is only five times more profitable than Apple. So who is it? What’s the stock that Timothy Lutts says we should buy “Before it Jumps Another 1,061%?”

Let’s have us a look-see.

The five-times more profitable bit is because the stock is up 1,000% or so during a time when Apple was up 200% or so — not a measure of the actual profitability of the company, but of the past rise in the stock. And, of course, like Middleby the stock likely has little or nothing to do with Apple — they just know that more people own and follow Apple stock than almost any other security, and are very aware of its past success as a stock, so dropping the name will get your attention.

So … how about some specific clues? This is what we get in the ad:

“… five times more profitable than Apple, handing investors 1,061% annual average gains since June of 2010….

“Analysts expect the company to deliver another 145% earnings for Q3 but also deliver 213% earnings growth for Q4….

“… the company has virtually no competition in its space….

“it’s one of the biggest profit takers in the specialized lithium battery sector.

“I guarantee you’ll never guess. Yet, this is the kind of company that has revolutionized the battery industry since Benjamin Franklin coined the term battery in 1748 and Thomas Edison created the first alkaline storage battery in 1901.

“But instead of powering a flash light, cordless drill, or wireless telephone, these batteries can not only power your car and space craft but even your entire home.”

More on this specialized battery company?

“it’s no wonder why this company is about to break ground on a $5 billion advanced battery construction facility that is projected to not only give electric cars a 200-mile range on one charge but also at a much, much lower price.

“The result: A boom in sales of electric and hybrid vehicles.

“Frankly, that’s why their stock has risen whopping 1,061% since 2010 and why we expect this company to repeat its great growth over the next four years.”

Really? OK, well, I guess we’re just going to start off a bit easy on this brisk, Fall Monday — we don’t even have to pull the tarp off of the ol’ Thinkolator to tell you that, yes, this is … Tesla Motors (TSLA).

What a mysterious stock, right? Do you believe the Cabot folks when they say that “99 out of 100 Americans have never heard of it?” That’s just idiotic. I know we live in a little bubble of people who are obsessed with investments, and that means we’re a self-selected group of people who probably aren’t terribly worried about where our next meal is coming from… but is it really possible that 99 out of 100 Americans have never heard of Tesla?

OK, fine, I know that’s not the point — it just rankles a bit. TSLA is absolutely one of the most spectacular investments of the past four years, it rose from just under $20 a share to the current price of somewhere around $250, and if Elon Musk opens his mouth again tomorrow it could easily go up or down by another 20% — Tesla is a story built on growth, technology and charisma, not (yet) a predictable or profitable or reliable stock.

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And yes, I confess that I completely missed the appeal of Tesla both when it was trading at $35 18 months ago and looked crazily overvalued, and in all the months since when it shot up and down on news of vehicle production rates, status of the next model, fights over their direct-selling model (which is illegal in some states), news about the potential “Bluestar” lower-cost car that they’ve been planning for years, and, of course, the plans for their mega $5 billion “Gigafactory” that’s designed to dramatically bring down the cost of lithium batteries to make a lower-cost electric car possible.

Here’s more from the ad about Tesla:

“And it’s because they dominate this sector no differently than Apple dominates digital music, Sirrus dominates satellite radio, and Space X dominates commercial space in the United States—only their profits are much, much bigger.

“So it’s no wonder that the world’s top 20 institutional and mutual fund holders own nearly $12 billion worth of this company’s shares.

“They recognize the same thing we do here at Stock of the Month: This is one company that is completely locked in for future growth both fundamentally and technically.”

I still find it very difficult to analyze Tesla as a car company, because nothing makes any sense at all. A car company can’t lose 5% on every car they make and still trade for 15X sales, can it? It’s just silly. I would have bet against Tesla a year ago or two years ago, when it was far cheaper, because it seemed impossible for them to live up to the promise and keep the financing going for this massive enterprise for the many years it will take to build to sales levels that can bring genuine and predictable profitability.

But, it turns out, you should never bet against a product that is slavishly adored by its customers, and you should never bet against a visionary like Elon Musk in a bull market. So Tesla is making a fantastic luxury product that is almost universally adored, and it’s incredibly expensive, and the competition in the electric car space is growing apace from Tesla “peers” (at least when it comes to the socioeconomics of their customers) like BMW and Audi as well as from dozens of others who have less compelling brands, and their next product, the gull-wing Model X SUV, is probably also going to be a fantastic hit… so where will the stock go?

Beats the heck out of me. Sometimes I just don’t get it — into that category of “Travis doesn’t get it” we can also toss Amazon (AMZN), with profit margins a sliver of that of Wal-Mart or your beleaguered local supermarket owner but growth that would make either of those retailers drool and a PE of 100+. So it’s quite possible that a ruling of “Travis doesn’t get it” is an excellent contrarian buy signal — I thought Amazon was too expensive at $50, even though I order something from Amazon almost every day. I think Tesla was too expensive at $40 and is just silly at $250, but I’d love to test drive one — or even buy one, if tomorrow the floodgates open and we get 80,000 new Irregulars joining us 🙂

Zeke Ashton had a pretty good presentation at the Value Investing Congress back in April, comparing BMW to Tesla as he was recommending BMW Preferred Shares, and this is a small excerpt of the notes I took that day:

“Tesla is more of a poster child for this environment than any of the other high price/sale valuation stocks … and that’s because it’s a car company, it does NOT have a scalable business model. Growth will take a tremendous amount of capital.

  • Market caps: Tesla $30 billion, BMW $82 billion
  • Vehicles sold last year: Tesla, 23,500, BMW, 2 million
  • Next year: Tesla 35,000 expected in 2014, BMW 5% increase on the 2 million.
  • Revenue: Tesla $2.5 billion (non-GAAP), BMW $104 billion
  • Net income: Tesla $100 million (non-GAAP), BMW $7 billion.
  • Gross margin: Tesla 22.7%, BMW 20%

“Last year, Tesla was not in the auto sales business — they were in the business of selling regulatory/zero emission credits. They deduct it from their cost of sales, which ramps up their gross margin. That’s 8% of revenue. It’s also 42% of their gross margin. Their profits were entirely due to regulatory credit sales.

“So what’s going to happen? Competition. BMW has been preparing to enter the electric vehicle market for a long time, and they’re entering the market now. The i8 next year will compete directly with high-end Teslas, much snazzier.”

It looks like he has published his Powerpoint presentation now for anyone to see, so you can check that out here if you’re interested. I found it pretty compelling, particularly the notion that Tesla’s growth potential has to be held up against the fact that growth will demand large capital investments not just for the Gigafactory, which will be partly paid for by suppliers like Panasonic and perhaps by other battery customers, but for actual manufacturing capacity at their plant or possible new plants, etc. etc.

That doesn’t mean Tesla is going to be a bad investment, of course, it’s up another 40% or so since Ashton’s presentation in April and is up several hundred percent since the last time I said it was too expensive, and it is still exactly the kind of thing that growth investors like most of the Cabot folks go for. I just don’t know how to guess at what valuation multiple makes sense for a story that’s built around a hugely popular luxury car, a revolutionary battery factory that just broke ground and should be operating by 2017, and a 2017 or 2018 “lower cost, higher volume” model — the fact that 10X sales seems silly doesn’t mean that it can’t go to 15X sales (where it is now), or to 25X sales… there’s no rule that says investors can’t buy whatever they want to buy, and they often want to buy stories that seem like they can grow forever. If you can figure out what you think Tesla is worth, feel free to let us know with a comment below.

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