And why didn’t we buy it earlier?
Over the last six months we have established a meaningful position in Tesla stock. Tesla illustrates the limitations and strengths of our investment approach.
First, our limitations and why we waited to buy the stock. In order to limit risk, we only invest in companies that are profitable. Additionally, our investments must demonstrate well above average profitability, a significant indicator of competitive advantage.
Tesla began to show modest profits in 2020, but only in 2021 did it become evident that those profits promised to be extraordinary. A year ago our assumption was that the company would be limited to typically mundane auto industry profit margins—in the 4% to 7% range.
But now it is obvious that, financially, Tesla is not just another automaker. Comparing it to Toyota and Ford, Tesla’s Operating Income is significantly higher than either one of these legacy automakers and gross profit is 50% higher.
Below is a ten year chart of Ford and Toyota stock compared to the S&P 500. Investors have understood for many years that the legacy automakers are subpar businesses. The prestigious German auto companies look no better.
Remarkably, Tesla will widen its efficiency lead over the legacy companies in 2022 and 2023 since it will increase production capacity by 50% to 100% as they go from two factories to four. In 2023 Tesla will have the ability to produce about 2 million vehicles out of 4 factories. In contrast, Toyota operates 67 production facilities to produce nearly 10 million vehicles per year.
We do not believe that Tesla will be the largest automaker in 2030 as Elon Musk predicts. But much like Apple, we believe that Tesla will achieve a respectable market share while producing an outsized share of industry profits.
We believe a benefit of our process is avoiding early stage companies which don’t succeed. And we have learned from experience that significant growth and stock price gains can follow strong profitability. We focus on those future potential gains, and try to avoid worrying about what was “missed” in the past.
While others may focus on being early, if a company is truly a long term winner there’s plenty of time to enjoy compounding profits.
Daniel A. Ogden
Disclosure: Dock Street Asset Management, Inc. and our clients own Tesla (TSLA). This article is not intended to be used as investment advice.