Why Tesla Makes Good Sense
Forget about the stratospheric valuation. Forget about the 30% short interest. Forget, for a moment, that it's a car company.
None of these things matter.
We see this every once in a while in the markets. Something really, truly new comes along. For lack of a better phrase: something revolutionary.We saw that with Amazon (AMZN) back in 2003. The industry laughed. No way could a retailer support such a valuation and a $50 target. Retail was a lousy, low-margin business.
We saw this with Google (GOOG) back in 2004. It IPO'd at $85 and at the end of the year was trading at $100. The financial industry laughed. No way, cried some on Wall Street, was Google worth $100 a share. Search was destined to be a niche business not a colossus. With Tesla, we're seeing many of the same themes play out. The financial industry is either laughing, or giving the car maker the cold shoulder. How could this company be worth $25 billion? Cars are a cutthroat, low-margin business, right? Google and Tesla have this much in common: They each blew up conventional wisdom with little regard for short-term profits, they gave consumers what they really wanted, and none of the traditional rules of investment or analysis applied.
You've never really been able to plug Amazon, Google or Tesla into a Graham & Dodd spreadsheet or try to discount their cash flows. These companies aren't as much businesses as they are engines for hyper-growth and innovation that can completely change their industries. Over the years, skeptics tried to have their way, but the road that revolutionary companies travel is littered with the bodies of traders who tried to bet against them. Remember the wise words of TheStreet's own Doug Kass: "Never short a concept or a valuation. Only short business models that are broken."