Tesla (TSLA) will report earnings after the bell Wednesday. I’m not predicting the number and I really don’t care whether management beats The Street.
And neither should you.
If we lift our collective eyes beyond the quarter to quarter drama, I see TSLA stock at $7000 a share by the end of the decade. Am I dreaming? Or worse, deluded?
Once upon a time I made my living analyzing companies and running model swing trading portfolios, but I’m a day trader at heart, so for me long-term means the 4 pm bell.
But I have to admit that once in a while an extraordinary company appears in the investment firmament that one should simply buy and hold. I believe Tesla is one of those emerging stars, perhaps the brightest we will ever see.
To stay with the astronomical metaphor, Apple, which at one time was the largest company by capitalization, is a dying red giant while twinkling little Tesla is destined to become the center of the investing universe.
The King is Dead, Long Live the King
Like Apple, Tesla is widely recognized as a disruptive technology company. The defining characteristic of such companies is that they suddenly reduce the cost of a key product or service by an order of magnitude (i.e. 10 times).
This is the economic equivalent of a large meteor hitting Central America. It’s bye bye dinosaurs; hello, something else.
More than a decade ago Apple reduced the cost of a hit song by an order of magnitude (down to $0.99) and it disrupted the music industry. Then Apple reduced the price of voice and texting by an order of magnitude and it ripped apart the telecommunication industry.
So what if a company were to disrupt the transportation industry? What kind of impact would that have?
It turns out that the transportation industry is many times larger than the entertainment and communication industries combined. Personal transportation is the 2nd largest consumer expense after housing. In 2013, U.S. households spent $1 billion per day on the purchase of new vehicles, but they spent even more on 135 billion gallons of fuel.
The New Dinosaurs
Tesla isn’t going to reduce the cost of vehicles, but what if the company messed with the $478 billion U.S. fuel economy (based on 2012 data), so that the price of fuel fell by an order of magnitude?
Tesla would not be able to accomplish feat this on its own, but it could catalyze a broad-based shift to electric vehicles over the next decade. Charging your car in your garage or at other free outlets sprouting up all over our cities will reduce your fuel bill by an order of magnitude.
According to a 2011 study by PricewaterhouseCoopers, if the US oil and gas industry were considered to be a ‘nation,’ it would rank as the world’s 16th largest economy with a ‘GDP’ of $1.1 trillion. That’s roughly equal to the GDP of South Korea.
Into Orbit
The collapse of the domestic oil and gas industry would not be a good thing, but it has happened before and will probably happen again. If Tesla were to ride this disruptive wave to its fullest, it would launch the company into the investing stratosphere, if not into orbit.
My back of the napkin calculation suggests that Tesla’s market cap would easily rise to equal Apple’s peak market cap ($700 billion), which would put the stock price around $7000/share. Take a breath. I actually believe that is a conservative target.
So how does one play it? One way is to be long TSLA and short the Energy Select SPDR (XLE). For patient investors, this could be a play to hold for the balance of the decade.
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Kenneth Reid holds a Ph.D. in Clinical Psychology. He is a trading coach who writes a regular weekly column for TraderPlanet. His other website is teslachronicles.com where he offers a low-cost trading service devoted exclusively to Tesla stock. Full disclosure: Dr. Reid is long TSLA.
