Tesla: Breaking Down Baron's Bull Thesis
Who is Ron Baron?
Ron Baron is a legendary American Investor and founder of Baron Capital Group, a prominent investment management firm. Born in 1943, Baron is known for his long-term investment approach and has achieved success by identifying and investing in companies with significant growth potential. Baron Capital manages various mutual funds, focusing on diverse sectors such as technology, healthcare, and consumer discretionary. Wall Street recognizes Baron for his optimistic outlook on the stock market and his unique ability to have conviction in his long-term ideas. In other words, Baron tends to both be right and sit tight.
Among Baron’s most recent investment triumphs is his oversized Tesla (TSLA) investment. Perhaps no one else outside of Elon Musk has a better grip on the leading EV-maker than Baron. Baron invested more than a half billion dollars in TSLA between 2014 and 2016 and has held it ever since. Baron Capital’s TSLA position has generated more than $5 billion in profits and catapulted the firm to being the only mutual fund to beat the Nasdaq Composite over the past 5, 10, and 15 years. Usurpingly, Baron remains as bullish as ever on the stock. Here are 3 reasons why:
Low Cost, Mass-Market Vehicle
An integral bear argument against owning Tesla shares is that the company is hyper-focused on only the luxury market. Though the strategy has worked thus far for Tesla and other luxury companies such as Ferrari (RACE) and LVMH (LVMUY), Tesla bears believe that it limits the total addressable market (TAM) for the leading EV-maker and puts a ceiling on growth. However, a recent Reuters report suggests that the days of only focusing on luxury clients are coming to an end. Reuters reported that Elon Musk plans to build a mass-market vehicle in its new gigafactory that will retail for less than $30,000 USD. Ron Baron believes that the “Model 2” $25k EV will begin selling within a year and a half. A new, mass-market EV would likely drive Tesla’s already “hockey stick”-like revenue trajectory even higher.
Image Source: Zacks Investment Research
Juicy Profit Margins Lead to Enormous Profits
In a recent CNBC interview, Baron said, “Ford (F) loses $36k per EV produced while Tesla makes between $8-9,000 per car. Tesla plants make about $15 billion per year on a $7 billion investment. An ordinary industrial company would make 15-20% on capital at the most – this guy (Elon) is making back his capital twice a year.”
The fact is that no other EV-maker has profit margins that are remotely close to Tesla.
Image Source: Zacks Investment Research
The FSD Leader
The race for self-driving vehicles is well under way and is competitive. Alphabet’s (GOOGL) Waymo and Mobileye (MBLY) are among the front runners in the space. However, Baron points out that Tesla collects 100 million miles worth of data a day and has more compute to train its FSD than any other company.
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