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Gambling on Tesla

11 April 2017

According to media reports, Tesla has become the most valuable car company in the USA, trouncing the previous leader General Motors.

How can this be?

Tesla doesn't produce nearly as many vehicles as GM and has never made a single dollar in profit in its entire 13 years of operation.

So exactly what's behind the meteoric rise in Tesla's share price?

Could this be little more than speculation and a bit of institutionalised gambling on the part of investors?

As a result of this Tesla-lust on the part of stock-holders, the company surged to a capital value of US$51.54bn today, exceeding GM's valuation by more than a billion dollars.

Is it that savvy investors can see that the future of personal transport is electric?

Or are they basing their decisions on little more than media hype and the desire to be part of a "sexy" industry like EVs?

To be honest, I'm not so sure I'd be putting *all* my money into Tesla, for a number of reasons.

First of all, Tesla are doing some ground-breaking stuff. They're creating new markets -- but can they continue to dominate them?

One of the major risks for companies that introduce "evolutionary" technology to create new markets is that they are often overtaken by other players who come along just a little later.

Being first in the game means that a company like Tesla has spent huge amounts of money selling the concept as much as the product. They've invested heavily in what amounts to "generation one" technology and that leaves them vulnerable to other players coming out with generation two products as their first offering. This could leave Tesla on the back foot, committed to last-gen technology and burdened with the huge cost of proving the viability of the EV to the masses.

Tesla's massive battery manufacturing investment is a great example of this. They're now heavily committed to the humble 18650 lithium-ion battery as the heart of their energy storage technology. When "the next big thing" comes along, they'll be burdened with this massive investment which almost certainly won't have even come close to covering the setup costs, while new entrants can jump straight into whatever battery technology supercedes Li-Ion.

I strongly suspect that every auto-maker worth their salt is carefully watching and getting ready to pick their moment to make a move.

If some clever boffins come up with a way to make fantastically dense supercapacitor storage or aluminium-air batteries that really work, the likes of Toyota, Ford or whoever could probably get their breakthrough offering to market well ahead of Tesla. Even if Tesla could match those offerings, they'd still have the huge financial burden of repaying the massive capital investment that's gone into their existing technology manufacturing plants.

Ford, Toyota and the rest have no such investment overhead to recoup at this stage and they still have the cashflow from their regular dino-juicers and hybrids to keep them going while they gear up for their own 100% EV offerings using Gen-2 technologies.

They don't call it "the bleeding edge" for nothing. Being a ground-breaker in new markets is an incredibly risky position to find yourself in and it requires fantastic levels of management and foresight to turn that early lead into a long-term position.

Yes, if I had a spare $1,000 I might consider putting $500 of it into Tesla shares -- but then again, given the current events in Syria and N.Korea, I might just be convinced that gold is a better option -- at least for the time being.

What do readers think?

Have you bought any Tesla shares? Will you be buying any? Or are you still waiting for your Martin Jetpack shares to mature and pay a huge dividend? (LOL).

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