While Thomas Edison is arguably the best-known American
inventor, a cult following has grown up around Nikola Tesla, the
Serbian engineer whose skills as an inventor, perhaps superior to
Edison's, were undermined by his inferior business sense.
And this cult MAY have reached its peak on June 29, when the
electric car company named Tesla Motors came public, raising $226
million from investors large and small who see great profit
potential in the business.
I say MAY because there's a POSSIBILITY that it will be years
before this stock (
) closes higher than it did on its very first day of trading.
And I say this because of three basic facts.
First, while every other automobile company on the planet has a
market capitalization of LESS THAN one year's revenues-they range
from 33% of revenues for Ford to 59% of revenues for Honda-Tesla's
market capitalization is now more than $1.9 billion, which is more
than 17 times revenues. In other words, TSLA is 38 times as
expensive as the average automotive stock.
Two, while the company has posted cumulative revenues of $148
million by selling 1,063 two-seat electric sports cars (currently
priced at $109,000) to customers in 22 countries, it has yet to
make a profit, and it has no proprietary technology that can
prevent other companies from competing, especially in higher-volume
lower-price mass markets. In fact, it now looks like there
will be a substantial time gap (and thus a revenue gap) between its
two-seat Roadster and its four-door Model S (priced at
$56,500)-promised for delivery in 2012; driving into this gap will
be the Chevy Volt, the Nissan Leaf and others.
Three, and most important, the stock's chart isn't going up, which
tells me that the public's appetite for the stock has been
satisfied for now.
Now, I hope I'm wrong. I admire Tesla's Roadster, impractical
though it is for my lifestyle. I've toyed with the idea of
reserving a Model S. And I do expect to see some Teslas on
the road in the years ahead.
After all, there's already serious money behind the company.
Elon Musk, the founder of PayPal, is a major investor as well as
the company's CEO; he's in for about $75 million. Also on
board are Google co-founders Sergey Brin & Larry Page, former
eBay President Jeff Skoll, Hyatt heir Nick Pritzker, Daimler AG,
Abu Dhabi's Aabar Investments, numerous venture capital firms, and
the United States Department of Energy, with $465 million from its
Advanced Technology Vehicles Manufacturing Loan Program.
Also, management's decision to launch with a high-priced niche
product-the same model used by the electronics industry-and then
grow by driving costs down and targeting larger markets-has proven
smart. Hopefully, they'll make many more smart choices in the
years to come.
But it's important to remember that the stock is not the
company. Even if the company does well, the stock may not.
The ideal investment, in my book, is an unheralded company whose
products are in increasing demand, whose profit margins are large,
and whose public perception grows as its business succeeds.
The risks of investing in Tesla today are that the company is
already well-known, and well-thought-of, thanks to its A-list
connections, and that increasing competition may make the road
ahead bumpier than anticipated.
If I had to invest in a car company, I'd invest in the one with the
strongest chart. That's Ford (
), which broke out to recent highs on Thursday and Friday after a
great earnings report and is the cheapest of the bunch.
But I'd rather not invest in the automotive industry, where high
debt levels remain a problem and profit margins seldom top 5%.
I'd rather invest in an industry that's booming, an industry where
the profit margins are high and the stocks are strong.
Today, the industry that best fills the bill is "cloud computing."
Which is what, exactly?
Well, there is no "exactly." Cloud computing, in general,
refers to the increasing migration of computing resources
(hardware, software, data storage, computing power and expense)
away from the user and toward a provider … who might be located all
the way across the country.
Cloud computing thus minimizes upfront financial expenses for
users, while maximizing computing capability. Users typically
pay using one of two models. They can pay based on usage, as
you do for your electricity service. Or they can pay a set
monthly or annual fee, as you do for your cable TV.
In some respects, the evolution of the computing industry is akin
to that of the electric industry long ago. Originally,
electric power was consumed where it was generated.
Eventually, the build-out of the electric grid allowed the
concentration of generating facilities as well as the distribution
Now, how far this trend to cloud computing will go, no one
knows. Will all data be stored at big central locations
eventually, or will we continue to control some locally? All
you need to know today is the trend is powerful, that numerous
companies in the (admittedly roughly-delineated) industry are
enjoying rapid growth of both revenues and earnings, and that many
of their stocks are strong.
I'm keeping an eye on eight of them right now.
One provides "scale-out network-attached storage systems."
One provides "application acceleration services."
One manufactures "network storage and data management hardware."
One provides products and services that "improve the accessibility
of data over wide area networks."
One provides "enterprise mobility software that enables secure
access to data, voice and video applications over networks."
One provides "on-demand customer relationship management
software." Yes, it's the famous Salesforce.com (
And one provides "virtualization software that enables
organizations to run multiple operating systems on a single
Some of these I've written about before and some I'll write about
But today I want to focus on Acme Packet (
), the market leader in the "session border controller"
industry. A session border controller is hardware and
software that allows real-time communications across different IP
networks, whether the content is voice, video or plain old
data. These networks might be wired, or they might be
The company also makes session-aware load balancers, multiservice
security gateways and session routing proxies.
Obviously, there are not household items. The biggest
customers for this equipment are telecommunications companies,
including Alcatel-Lucent and Nokia-Siemens. But if you
consider the growing amount of IP networks and traffic traveling on
these IP networks, and the prospect that this growth can continue
for a very long time, you'll understand why revenues have grown
every year since the company's first sale in 2003, why they grew at
an impressive 65% rate in the first quarter, and why analysts are
now projecting that earnings will grow 94% for the full year!
Also, profit margins hit a very healthy 20.9% in the third
quarter. And that's a profit margin the folks at Tesla can
only dream about.
I wrote about Acme Packet here back on May 10, when it was trading
at 26. After that it pulled back to 24 several times, but
it's been generally trending higher, propelled by the buying of
investors who are learning about its great growth potential.
If you bought it back then, congratulations. I suggest you
hang on tight.
If you didn't buy, and you think you'd benefit from hearing the
fuller story-as well as getting regular updates, so you know when
to sell-I suggest you take a look at Cabot Top Ten Report, which
first recommended the stock in March when it was trading at 17.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory