Published on May 21st, 2018 | by Kyle Field0
Billionaire Ron Baron Sees Potential To Make “20 Times Our Money” With Tesla [TSLA]
May 21st, 2018 by Kyle Field
Bullish billionaire Ron Baron sees such potential with Tesla that he expects his investment firm Baron Capital to make an absolute killing on TSLA stock.
To back up his optimistic statement, he referred simply to the divide we see within TSLA investors.
On one side: A small, vocal set of stock shorters – or those betting against the stock – constantly flagging the firm’s inability to deliver quarterly profit as a key indicator of its impending failure.
On the opposite side of the table: Those investing for the long haul in TSLA, citing the industry-leading gross margins Tesla makes on each vehicle, offset by monthly capital expenditures that climb further and further, with curves getting steeper and steeper as it continues to push aggressively into new markets. There’s its recently launched Model 3, its recently unveiled Tesla Semi, and its highly anticipated Tesla Model Y compact utility vehicle and Tesla Pickup.
“I think we’re going to make 20 times our money because the opportunity is so enormous,” he said to CNBC’s “Squawk Box.” “People say, ‘Gee, they’re spending a lot of cash.’ Of course, they’re spending a lot of cash. They’re building factories.”
And boy are they building factories. To put that into perspective, Tesla’s Fremont factory in northern California and its Gigafactory 1 just outside Reno, Nevada, are the two largest factories in the world by square footage. The reality is that this is just the beginning. Gigafactory 2 was obtained with Tesla’s $2.6 billion acquisition of SolarCity, and it was already being called the Gigafactory of solar before it became part of the Tesla family.
Gigafactory 2 is currently focused on building Tesla’s solar products, including traditional solar panels and its new solar roof tiles, but is expected to add Tesla battery cell production and even vehicle production in the future. Tesla is expected to announce the locations of 2 more Gigafactories by the end of the year, with a factory in Shanghai, China, all but certain at this point.
Remember, these Gigafactories are the largest factories in the world and Tesla is actively spinning up two of them with two more in the works. The expected price tag for each Gigafactory is in the $5–10 billion range.
Getting back to Ron Baron, his firm manages a vast pool of investments, with $27 billion in assets under management, of which 1.62% is TSLA. A big concern with many institutional investors is Tesla’s endless thirst for capital, fueled by its desire to build more and more Gigafactories around the world. Baron doesn’t expect that Tesla will need to go back to the bond market for more capital … unless “he wants to grow as fast as he hopes.” For anyone that knows Elon and Tesla’s history, Elon surely wants to grow Tesla as fast as possible, but whether or not he will actually raise money in the way Tesla has done in the past to pursue that rapid growth is the real question.
Elon is infamous for operating on “Elon time,” where his vision and goals always far exceed his grasp, leaving Tesla underperforming versus his stated timing at nearly every step of the way. Though, Elon also has a response to that:
I'm doing my best to recalibrate, but that is a fair criticism. However, if I wasn't inherently optimistic, I wouldn't be doing electric cars and rockets in the first place!
— Elon Musk (@elonmusk) October 6, 2017
Baron puts his own comment into context by noting that he believes Tesla’s focus on streamlining manufacturing through automation will drive reductions in labor spending. That ultimately means less capital expenditure up front, balanced by higher risk of production ramp issues, as have been experienced in the Model S, Model X, and Model 3 production ramps over the last few years.
He’s clearly used to balancing risk and reward and noted that the strategy for finding big rewards doesn’t start with buying safe stocks of established companies. “What we try to do is buy when that development is taking place.”