Ron Baron Comments on Tesla
- from Ron Baron's Baron Partners Fund 2019Q1 shareholder letter.
The 15.9% decline in the price of Tesla's stock in the first quarter penalized the Fund's performance by 2.82%. Tesla is Baron Partners Fund's second largest holding and represents 10.7% of its total investments. We believe Tesla's recent share price decline will be short lived but we cannot guarantee that will be the case. Tesla shares fell principally due to concerns about: near-term demand for its mass market Model 3 cars; concerns about Tesla's manufacturing capabilities; and the complicated logistics of beginning to deliver its Model 3 cars to Europe from California. Tesla's Model 3 cars are experiencing extraordinary demand throughout Europe; the "gating" factor that limits its car sales continues to be insufficient battery production to meet demand for its cars and commercial applications which is being addressed; and more than 10,000 cars on the water at quarter end not delivered to its customers...and therefore not yet recorded as sales...Tesla's car "pipeline" is being filled. Tesla is making progress contracting for additional battery production; its new car factory in China will open in 2019 and add production capacity; and demand does not seem an issue for this business that will likely produce 360,000-400,000 high-quality, affordable electric cars in 2019. About 90 million cars per year are sold across the globe. Tesla's newly inaugurated leasing program is creating additional demand. About 60% of cars sold by others are leased. Until April, Model 3 had no such program. Lower priced Model 3 variants are also increasing order rates although few additional orders are for the stripped-down model. Tesla is revolutionizing the automotive industry (in addition to the transportation and energy industries). Its electric car at an affordable price with low ongoing maintenance costs is the safest vehicle available according to NHTSA. We continue to believe Tesla's opportunity is large and the company can accomplish its mission to produce an electric vehicle that competitors cannot match on quality or price. We do not believe quarterly results are necessarily indicative of Tesla's long-term success. We purchased Tesla's stock five years ago. Tesla's sales have since increased from $3.7 billion per year to $21 billion in 2018 and could reach an estimated $28 billion-$30 billion this year. Tesla's share price has increased from $208 per share to $280 per share, far less than the growth of Tesla's business. We do not expect Tesla's share price to continue to lag the performance of its business.
We're doing our part. In addition to raffling a Tesla Model 3 as a door prize at our annual fall Baron Investment Conference for the past two years (at our expense, not at yours or Tesla's), last week, my family purchased its first Model 3 (we already own one Model S and two Model Xs). It was a red one with all wheel drive and an extended battery life. Just to make sure I didn't make any mistakes ordering - it's very easy to order online - I spoke to a young woman in charge of Tesla's sales in the Northeast. She used to work for Porsche and then owned a Panamera. She described to me her awful experience repairing Bluetooth in that expensive car...which she has since traded for a Tesla. It took five days! If there were such a problem with a Tesla, it would be fixed in five minutes over the air!
She also told me she considered Elon not only an engineering genius but a marketing genius as well. While other automobile manufacturers spend significantly on purchased media, i.e. advertising, Tesla spends exactly nothing !!!! Elon's genius is in remaining relevant through his Twitter commentary about his cars and being transparent about his company in dialogues with Tesla's customers and employees. This individual also mentioned that her husband "borrows" her Model 3 regularly and has sold three in the past month! "I'm considering hiring him," she joked with me. One accountant who works with me lives in New Jersey. Her family recently bought a Model 3 and parked it in her driveway. She told me all her neighbors stop to look and ask her about it. She also told me how excited her husband and children are with their new Tesla. When they took their daughter for her first ride, she stood up behind her father "'ccelerate, Daddy, 'ccelerate!!!!" she implored him. I hear similar stories from a number of the 166 individuals with whom I work seemingly daily.
