In Focus: Tesla's Focus
Updated: Jul 4, 2020
Focus - noun: the center of interest or activity.
Focus is everything. Those that succeed usually have immense focus on what they're doing and what they're trying to achieve. Focus goes hand-in-hand with hard work. If you're working hard without focus, what are you actually working towards?
Focus determines the winners from the losers in the stock market as well. If you let your mind wander briefly to the failed mergers and takeovers you've lived through, you will likely find that focus is to blame for the mergers and takeovers that didn't work.The acquiring company lost focus on what they were doing to get into another fast moving industry; or the acquiring company kept all the focus on their business and let the company they acquired run wild and destroy value. Long story short, focus is everything.
This week Amazon (AMZN) suspended their third party delivery business to focus on their own deliveries. Xerox (XRX) ditched their efforts to acquire HP to focus on getting their business through the coronavirus.
Focus, will allow Tesla (TSLA) investors to win big in 2020 and beyond.
Just two months ago Tesla's stock traded to over $900 per share. A lot of the move up was due to good news coming out of the company, and some of the move up was due to short sellers having to cover their positions.
A brief history of the factors that helped catapult the stock earlier in the year. In Q3 2019, analysts expected a loss of $0.23 per share, Tesla surprised everyone with a profit of $1.91 per share. Loving the attention they received from the first surprise Tesla performed an encore and reported an EPS beat by $0.38 in Q4 2019, with an EPS of $2.14. Back-to-back quarters of profits sent investors to their trading accounts to buy Tesla shares. The company was proving that electric vehicles could be profitable.
On the other side of the stock's rise, short sellers have long argued that Tesla's fundamentals did not warrant its valuation, which wasn't crazy to think. In 2018 Tesla's market value was 89% of Ford's market value and 69% of GM's market value, while only selling ~10% of the amount of vehicles that Ford sold in 2018 and less than 9% of the vehicles GM sold in 2018.
The simple question of how could a company doing less be valued at more enticed short sellers to bet against Tesla.
There were also other issues within Tesla that gave short sellers ammo to bet on the stock's decline. Elon Musk, Tesla's owner was involved in an SEC investigation after a tweet about taking the company private. He was also involved in a court case with a diver from Europe over a Twitter name calling session the two were involved in, and then there was Tesla the company, which was overpromising and under delivering, while burning through tons of cash.
When the good news of the two profitable quarters sent investors racing to buy Tesla shares, short sellers watched their losses grow bigger with every uptick in price. With the need to limit losses, the short sellers were forced to cover their positions, which led to more buying, and as a result Tesla's stock traded to over $900 per share.
But Back to Focus
The coronavirus crisis will force everyone to focus on what they do best. This will be the fastest way to recovery for many companies. The traditional automakers will focus on the production of combustion engine vehicles, because that's where the profit is. Tesla will focus on electric vehicles, which will help them widen their already extreme lead in the EV space.
I, like many analysts expected 2019 to be the year of reckoning for Tesla. I expected competition from automakers with years of experience in mass automobile production to enter the EV space and steal market share from Tesla, but it never happened. Mercedes, Jaguar, Porsche all threw their hats in the ring in 2019 but failed to make a splash. The EV space is officially Tesla's.
Because of no fault of its own, Tesla's stock has dropped from the $901 per share close on February 17, 2020, to $573.00 as of this writing, a 36% decline in a matter of a month and change. This has created a tremendous opportunity for investors that missed that initial ride from $300 per share to $900 per share.
I expect a slow start out of the gate for Tesla post-coronavirus crisis, but my gut says they'll be behind the 8-ball in a good way and in a way they're very familiar with. I anticipate the demand for Tesla vehicles will still be there post crisis, but the company will be short on supply for some time. But because electric vehicles are Tesla's area of focus, they will be able to build their supply of EVs faster than their competitors who are focused on gas powered vehicles.
The Bull Case for Tesla
Recovering economically for automakers post crisis will require focus. Automakers will need to focus on their breadwinning products, which isn't electric vehicles for most automakers. Tesla's focus on electric vehicles will allow them to widen their lead in the space. If automakers put more of their focus to their bread and butter (combustion engine vehicles), even for a short period of time, the consumer demand for an EV will flow towards Tesla.
When we emerge from the coronavirus crisis, companies will be in the mode of keeping expenses low and focusing on operations that bring cash flow, and for some of Tesla's competitors EVs is not where they make their bread and butter yet. This unfortunate setback for many automakers is a big bonus for Tesla and investors would be wise to take advantage of Tesla's advantage.