One Stock, 3 Big Markets


Callum is going on about oil again.

So said one of the young guys in the office yesterday. It’s true. I have been rabbiting on about it a lot lately.

I don’t think there’s a story any more important than this one for the rest of 2019.

For example…

Some of the issues bubbling under this market are beginning to leak into the mainstream.

The Australian Financial Review has a piece in today’s paper on the new environmental rules known as IMO 2020.

They could hurt the LNG price for Australian producers but give Japan a lift through cheaper gas.

This comes on the back of analysts also beginning to worry about how rising diesel costs could hurt the bottom line for heavy users like miners.

You see? This is the kind of issue that can drag down a stock you own for a reason you might not see coming…unless we keep reminding you.

But today’s Profit Watch wants to dig deeper into a separate idea…

I suppose they’re related — in a way. It’s do with Tesla [NASDAQ:TLSA].

A rising oil price certainly changes the dynamic between comparing the cost of running a conventional car versus an electric one.

But that’s not our focus today. It’s something else.

The Wall Street Journal reports that Tesla is going to launch its own branded insurance program.

This could be an inspired move. Tesla is recognised as having a massive lead on its competitors on the data it has amassed from its fleet of vehicles.

One advantage of this is that Tesla’s autonomous driving capability is way ahead of everyone else’s.

But this data also feeds back information on each driver…and the risk they present on the road.

Key point: 94% of wrecks are attributed to driver error. US car insurance premiums totalled US$246 billion in 2018, according to the WSJ.

Tesla could capture quite a bit of this.

Certainly, Tesla has better insight than any other insurer currently operating…as far as anyone is aware, anyway.

That means Tesla can offer low-priced insurance, and probably with less risk.

It may help improve Tesla’s competitive position generally.

The Wall Street Journal says Tesla is one of the more expensive cars to insure in the US.

As autonomous cars take off, one would think insurance premiums are going to drop in general.

All this adds some extra spice to a very interesting situation already…

Take advantage of Wall Street’s confusion

Tesla is THE most polarising stock in the world right now. Its detractors say it does nothing but lose money to fight a war it cannot win. They point to accounting ‘quirks’ and shaky cash flows…plus high debts.

They brand CEO Elon Musk as erratic, if not completely unreliable and unhinged.

But then come the bulls. They point out that Tesla is not comparable to a traditional car manufacturer. It has the most data, with the best AI system to make the leap to autonomous vehicles.

That’s not all…

The vision for Tesla is to build an ‘autonomous taxi network’ where you don’t even own a car. You just rent as you need.

Tesla expects this to be live by the end of 2020 — if you’re prepared to trust Elon Musk. 

That means Tesla could potentially eat the market for taxis and ride-hailing companies like Uber and Lyft combined.

Uber has a current valuation around US$75 billion. Tesla’s is around US$43 billion.

That’s not all. You could even be paid for owning a Tesla — by renting it out as an autonomous vehicle.

Then we have the simple fact that electric cars are on track to win increasing market share. Government mandates are almost certain to ensure it.

Tesla’s stock has taken a bit of a battering recently. But the company eased its immediate cash flow concerns by entering the capital market to raise more money.

What to make of this?

The market is always about risk versus reward. I think of Tesla a bit like an option trade.

A small stake could pay off in a big way if — and it’s a big IF — Musk can pull off the full vision for the company.

But he might bust out as well. Not completely — a rival would buy it if it fell into severe distress.

But an option can decline fast in value. Tesla could do so too, if it runs out of money. Corporate debt is already sky-high in America…and conditions may not be this benign forever.

You’d have to go into the trade with this possibility in mind.

The volatility in this stock is also very high. That rules out a really big position, in my book.

But a nibble at this point? It’s worth thinking about.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch