Sometimes we rock back in our chair, stare at the crease where wall meets ceiling and scratch our head.
We’ve been in the investing game a long time – our whole career. Every once in a while, something happens that utterly confounds us.
This week it’s the oh-so-intriguing fact that Tesla (TSLA) somehow managed to become America’s most valuable automaker.
Move over, Detroit… Silicon Valley is taking over.
It’s a head-scratcher, to be sure.
As a public company, Tesla’s managed to earn a profit in only two quarters.
It lost $773 million last year.
It sold just 76,000 cars.
Meanwhile, the behemoth it eclipsed this week is on a tear. General Motors (GM) banked a $9 billion profit last year and sold some 10 million cars.
And yet… Mr. Market has its money on the new guy.
As we’re fans of history, this story has our leg twitching like a dog getting his ear rubbed. It’s rich with lessons we can use to make some money… and grow our beloved Liberty.
In fact, a fascinating story of what happened some 130 years ago shows us where shares of Tesla are likely headed next.
AN ELECTRIFYING RIVALRY
The man whose name helped inspire this revolutionary company is Nikola Tesla – a Serbian inventor who came to the United States in 1884.
Receiving high regards about the immigrant, Thomas Edison hired Tesla to help with his inventions.
Within months, the two zealous scientists were arguing more than they were working.
They parted ways… launching a fierce rivalry that’s recently exploded once again.
At the center of their fight was the idea of how to get electricity to the masses. Edison insisted his direct current (DC) system was best. It maintained a lower voltage and was far safer, he claimed.
Tesla, though, rallied behind alternating current (AC). Yes, the voltages were higher, but a current that quickly reverses direction is much more efficient on a larger scale.
Tesla, as most of us know, won.
He sold his patents to George Westinghouse – another bitter Edison rival – who went on to use the technology to build a power plant at Niagara Falls that powered New York City.
But here’s what’s crazy… the AC vs. DC fight is as big as ever.
Despite over a century of AC-dominated infrastructure buildout, DC is threatening to make an illuminating comeback. In fact, it’s on the threshold of becoming the world’s standard.
And that’s good news for Elon Musk and his company.
You see, thanks to the advent of new technology, many of the previous limitations of DC are out the window.
That’s why all of China’s new high-voltage lines are DC. It’s why Europe is quickly expanding its use of the technology. And it’s why alternative energy proponents in the States are adamant about adopting the technology.
Again, good news for Musk.
As he knows… nearly everything related to batteries and energy storage is DC-based. It’s the same with solar and wind energy. But by converting these forms of generation to our now-antiquated AC system, we’re losing as much as 20% of the power.
It’s no wonder that nowhere is the rivalry between AC and DC quite as alive as it is within the corporate walls of Musk’s Tesla.
The truth is, despite the corporate name on his business cards, Musk is more of a fan of the man who propelled the DC system… Edison.
“I think Edison was certainly a role model, probably one of the biggest role models,” Musk said earlier this year.
“The car company is called Tesla… because we use an AC induction motor, which is an architecture that Tesla developed. And the guy probably deserves a little more play than he gets in current society. But on balance, I’m a bigger fan of Edison than Tesla because Edison brought his stuff to market and made those inventions accessible to the world, whereas Tesla didn’t really do that.”
That’s the idea that takes us back to our head-scratching.
Why is Tesla – a company that’s losing money and hardly produces any cars – worth as much or more than the giants that pioneered the auto industry?
Ah, that’s where our abridged history lesson becomes so powerful.
Tesla – as a company and as a man – is and was a disruptor.
The man invented a superior technology and teamed up with the right folks.
The company is doing the same.
But what’s crazy is it’s likely to enter the world of profitability thanks to Edison’s technology – not Mr. Tesla’s.
We believe it’s not the company’s cars that have caused investors to bid up shares of Tesla. No, it’s the world’s new love affair with Edison’s old technology.
Truth is… Tesla would be selling shares of the company that bears his name. But not Edison. He’d be the most bullish of the bulls.
That’s the lesson for all investors. The smartest technology today may not be the smartest technology tomorrow.
Do we think Tesla is a good company doing good things? Yes.
Do we think it’s a car company worth more than Ford or GM? No. Far from it.
But as a disruptor, it’s a very valuable company.
Tesla may have the name… but Edison has the technology.