Tesla Motors Inc (NASDAQ:TSLA)’s stock is doing very well given the circumstances. The last time crude oil tanked, Tesla’s stock fell by over 30%. This time around, the stock is up 13.8% year to date, even though crude oil is under $45 per barrel. Tesla’s relative strength is all the more impressive given Tesla’s 50,000-55,000 vehicle guidance for 2015 and the Model X production delays.
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Tesla’s relative strength is good for many hedge funds who own the stock. At the end of June, 26 funds, out of more than 730 in our database hold some $1.39 billion worth of stock as of the end of June. Among them, Daniel Benton‘s Andor Capital Management owns 1.0 million shares, while Masters Capital Management holds a ‘Call’ position worth $327 million. Balyasny Asset Management owns 310,730 shares as well. We mention the hedge fund activity concerning Tesla because following hedge funds can generate alpha. Our research has shown that the 15 most popular small-cap stocks among hedge funds have outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012, and they managed to return more than 118% over the ensuing three years and outperformed the S&P 500 ETF (SPY) by over 60 percentage points.
Investors are buying Tesla Motors Inc (NASDAQ:TSLA) for two reasons. First, Tesla is officially in the energy storage/battery business with its May launch of Tesla Powerwall. Powerwall is a battery that stores energy for home use. The new product could be a game changer because it frees homeowners and businesses with solar panels from the grid. Many savvy investors are bullish on Tesla because of Powerwall’s potential. Bond God Jeff Gundlach once said:
“I like Tesla. It’s the batteries. It’s all about the batteries. I think they can ultimately change society if they pursue battery technology that really creates the ability to store enough energy that you could, say, run a house on, get yourself off the grid.”
Second, some investors expect Tesla to launch an autonomous ride sharing app, or Tesla Mobility, by 2020. Ride sharing apps are extremely hot right now. Leaked data shows that Uber, the current leader in ride sharing, expects to realize $10 billion in gross revenue in 2015 and $26 billion in gross revenue in 2016. Assuming Uber’s take of 25% of gross margin and a 25% profit margin, it could potentially make a normalized $1.6 billion in profits next year. Assuming a forward valuation of 30, Uber could become a $100-200 billion company in a few years if it keeps doubling or tripling every year.
A big part of Uber’s moat is the tens of thousands of drivers on its platform that reduces the wait times for a ride. The shorter wait times make Uber superior to other ride sharing apps. Once autonomous vehicles hit the streets, however, human drivers are no longer needed and Uber’s advantage suddenly goes away. If Tesla chose to do Tesla Mobility, the waiting times could be as short as Uber’s and its prices could be cheaper than Uber’s because Tesla Mobility wouldn’t have to pay for vehicle markups.
Tesla could make Mobility work through a spun-off company, to which Tesla could sell vehicles, and which could issue shares to investors. Tesla Mobility would then use its autonomous vehicle fleet to generate a stable cash flow stream to pay its shareholders dividends, not unlike today’s MLP’s.
The thought of Tesla Motors Inc (NASDAQ:TSLA) launching a mobility app seems crazy now, but other vehicle and tech companies are considering launching similar products as well. According to Reuters, Mercedes-Benz is considering establishing a large fleet of autonomous cars to cater to people who don’t want to own cars, but still want to ride in premium vehicles. According to Business Insider, Google Inc (NASDAQ:GOOGL) is considering its own autonomous vehicle fleet one day too.
If Tesla gets a running head start in autonomous vehicles and home batteries, the two initiatives could generate significant value for its shareholders. Given Tesla’s stock price and recent price action, it seems that’s precisely what many investors are betting on.
Disclosure: None
