Tesla is the definition of a cult stock. It is the kind of stock that, as a hedge fund manager, I most feared betting against--and, yes, I notice that our esteemed colleague Doug Kass is doing just that--because the manager of the stock, Elon Musk, is not only brilliant at building a great car but at building a great stock too.
Consider every single box he checked in the quarterly statement:
- Higher sales than expected.
- Higher gross margins than expected.
- Raising the forecast of cars to be sold and revenues for 2014.
- Raising gross-margin guidance for 2014 because of economies of scale (think Henry Ford).
- Aggressive expansion in China and Europe--after the downturn of the latter.
Now consider all the objections Musk answered, including those from the ridiculous ancient "sell" recommendations, like Bank of America Merrill Lynch's $65 target:
- Musk guaranteed the price of the used cars. Now it looks like used cars are maintaining or increasing in value.
- There were worries about the cost of batteries, but we are told to stay tuned because of a major reduction in the cost of battery production.
- Can the batteries be mass-produced? That has been a concern. Now he's talking about a "giga factory" that can make batteries not just for Tesla but for the whole solar industry. Why doubt a guy who has the very successful SolarCity sister company?
- Is Tesla really catching on in China? Of course it is, Musk points out, because those stores are the busiest in the chain. Oh, and unlike Starbucks, he's not charging more for cars in China than in the United States.
- Can you really drive across the country, especially in the cold? Darn it all, you bet you can, and Musk has not one but two examples of people who have done it, including a citizen who is unaffiliated with the company!
- No, Tesla will not follow the other car companies into charging "excessive" prices to customers in certain markets because that would be "inconsistent with building long-term loyalty."
- No, Musk won't need more money because the operating cash flow is positive, so there's no new equity offering for shorts to cover with in the immediate future.
And, of course, Musk uses every single question in the conference call to drive home these points again and again--brilliant stage management of the call, just like the brilliant writing in the release. What can I say? This release is a virtual parody of what a long owner wants to hear--and an actual nightmare for short sellers.
I take a lot of heat because I call Tesla, Solar City, Twitter, Netflix, and Amazon "cult stocks." That's because I'm not coming out and saying you should buy or sell them. What I am saying is this: If you can handle the pain and heartache that could come from owning them, then by all means own them--preferably through calls because, if they screw up, cult stocks can plunge well beyond where you thought possible.
I arrived at this analysis because I traded through the 1999-2000 period and saw the damage cult stocks can do to short-sellers and the profits they could make for the longs. I don't condemn stocks, and I don't condemn managers who know how to "run" them. I condemn illegality, and there is none here. I criticize stupidity and arrogance, as has been the case with several other tech stocks over the years.
But Tesla? My hat is off to Elon Musk. He's made a study of cars. He's made a study of growth stocks. And he knows how to make both better than anyone I have ever seen in history.
Random musings: What can I say about Facebook's acquisition? My kids love WhatsApp; and they are almost never wrong.
Disclosures: Cramer's charitable trust has no positions in the stocks mentioned.