NEW YORK (TheStreet) -- We've all seen how Tesla (TSLA) - Get Report shares more than doubled in just a few daysor weeks. I'm probably not alone in having asked myself: "How did allof those shorts get it so spectacularly wrong?"
I think I have figured it out. What the Tesla shorts seemto have in common are:
1. They're almost all New Yorkers.
Aside from the fact that most of the big hedgies
are in andaround New York City, why does this matter, you ask? In Tesla's case,it's actually important.
Much of what I hear from that corner of the world is that they areskeptic of Tesla because they never see Tesla cars on the street. Youcan walk around Manhattan or tool around Stamford, Conn., for hours notseeing a single Tesla.
Therefore, their argument goes, Tesla may not be selling as much asthe numbers seem to suggest. In any case, there is something suspecthere.
This is very similar to the situation in July 2007 when it was theearliest days for the first iPhone. This product hit close to 5%market share quickly in Silicon Valley, but only much later in mostother cities, including New York.
So why is that important? Well, customer adoption is not uniformacross geographies. "The tip of the spear" tells you today where therest of the world is going tomorrow. It's the canary in the coalmine.
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In the case of the iPhone, as well as with Tesla, this canary residesin Silicon Valley -- not New York City. The point is this: If productX (iPhone or Tesla or whatever) can get to 5% or some relevantrespectable number in almost zero time in Silicon Valley, it is likelyto get there in the rest of the country -- and the rest of the world-- also, at some time a couple of years down the road.
I have written multiple articles earlier this year about how Teslagathered 100% or close to 100% market share in the luxury sedan marketin Silicon Valley almost overnight. There is nary a brand newMercedes S class or BMW 7 series to be seen so far this year on thestreets of Silicon Valley. Everyone is buying a Tesla. Take a drivethrough some neighborhoods and you will see one in a large percentageof the driveways.
If all you see are the non-existent Teslas on the streets of New York,you would never believe this. These are the same people who shorted
in 2007 on the theory the iPhone would never get more than1% or whatever market share.
Even after the recent decline in Apple shares, shorting Apple in 2007turned out to be bad idea because Apple now has close to 20% of theworldwide smartphone market share, not below 1%.
2. They didn't even drive the car.
I'm obviously generalizing here, because most likely there is at leastone Tesla short-seller who drove the car. However, I get theimpression most of them didn't.
Actually, it gets better than that. How many Tesla short sellers havedriven or owned one of
Chevrolet Volts or a
Focus Electric?So far, I have yet to encounter a single one.
In other words, the pessimism toward Tesla has less to do with Teslaitself than it has to do with electric cars in general. The shortssimply don't understand why people would be interested in owning anelectric car --
Much of the debate centers around whether Tesla is environmentallyfriendly or not. If it's not, then I guess the stock is a short, orat least so the argument goes.
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That theory totally misses the point, in my view. Most people I knowdon't buy a Tesla because they think it's environmentally friendly,whether that's even true or not.
Most people buy Tesla -- and other electric cars -- because they drivebetter. They're quiet, have gobbles of instant torque and allow forthat unique feeling of one-pedal driving. It's like buying a PC withan SSD instead of a HDD. Fewer moving parts mean they don't requireservice -- you just drive them forever, just like an iPad.
If you have not owned an electric car or driven it more than aroundthe block, you would never know. Therefore, as a short, you areaiming in the wrong direction, and so you miss.
It's not relevant whether an electric car impacts upon the environment ornot. I personally don't think there is anything wrong with theenvironment -- other than the loud noises made by cars and trucks -- sothere is no problem in need of fixing except for noise pollution.Electric cars are awesome in the same way a Porsche 911 is more fun todrive than
Corolla. An electric car makes a Porsche 911 seemboring and unsophisticated.
Once people get behind the wheel of an electric car and can drive itin a relaxed manner in their everyday routine, they tend to buy them.Driving is believing. That should tell you something. Just look atthe owner satisfaction ratings, whether for Tesla, the Chevy Volt orfor that matter the iPhone.
3. Underestimating sales projections
Tesla has guided to 21,000 cars this year and 45,000 cars per year"over time." Most Wall Street estimates show some sort of ramp from21,000 to 45,000 cars over a whole bunch of years.
These are totally wrong.
The 2013 number may not exceed 30,000 cars, but five years from nowTesla would be capable of selling 200,000 to 450,000 cars per year.By 2017, Tesla will have a car that will cost less than $40,000 ininflation-adjusted dollars.
In the U.S., 16 million cars are sold every year, and 80 millionworldwide. If we were talking about smartphones you should see over50% of these being the new technology well within a decade.
By 2018, half of all drivers will have experienced driving an electriccar. Almost all of them will want to buy one. Tesla will, in turn, getsome share of these. At 1% of the worldwide car market it would be800,000 cars per year. That's the approximate level Tesla should endup longer-term.
How many Wall Street analyst models have Tesla selling 800,000 carsper year? I haven't seen one yet.
Here is one thought experiment: Tesla says it can sell 15,000 carsper year in the U.S. Actually, it is off by a fair bit there, too.Tesla can sell those 15,000 cars per year in the 80-mile corridorbetween San Francisco and San Jose, Calif. At the current sales rate,it is probably doing it already.
So what could go wrong with my ultra-bull Tesla thesis?
There are obviously all sorts of execution risks, all the way to aCalifornia earthquake. However, the big one is simple: competition.Every other car maker will be launching very attractive electric carsbetween 2013 and 2017.
Contrary to rumor, the big car makers are not too stupid. They arewatching, and some of them are feeling the pain from Tesla'scompetitive heat in Silicon Valley sales.
The big car makers may have been off to a slow start, but that willnot last forever. In a few short years -- starting with
andGM/Cadillac -- Tesla will eventually end up with significant premiumelectric car competition. One decade from now, at least 50% of allnew cars sold will be electric -- possibly 70%. Almost perdefinition, the other car makers -- from Ford to VW to Toyota and allthe rest -- will have numerous electric cars on the road by then,starting under $20,000.
Here is the bottom line: If you are short Tesla stock and you havenot spent any meaningful time driving an electric car (Tesla orotherwise), and you based your observations on electric car adoptionoutside Silicon Valley, and you think that electric cars in generalaren't going to dominate within the decade -- I'm sorry, but thenyou're an idiot.
Full disclosure: I have spent over 25,000 miles driving every singleelectric car in the market -- I think -- except for the
. Basedon this, I feel like I'm qualified to invest in Apple stock based onbeing the first guy in line to have bought the iPhone on June 29,2007.
At the time of publication the author was long AAPL..
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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