Clay Finck (03:18):

Now, in today’s episode, we’re going to be doing a bit of a deep dive into Tesla. Before we do that, I wanted you to touch on some of your overall investment philosophies. How would you describe your overall investment strategy?

Ryan Reeves (03:33):

I don’t love the growth versus value distinction just because, Warren Buffet talks about it. Growth and value are just two sides of the same coin and if you have a company that’s growing really fast, it could be definitely a value investment even though it multiple might be higher than people think is a good idea to buy it. I guess but if you have to sort of put a label on it, I would say it’s [inaudible 00:03:57] more fast growing companies. The way that I think about it is I’m trying to find the highest quality fastest growing companies.

Ryan Reeves (04:04):

A lot of times companies that, like some biotech that’s growing 400% because of just some drug was approved and they’re getting it rolled out. That might be the fastest growing, but based on my circle of competence and just the overall market dynamics, it might not be the highest quality.

Ryan Reeves (04:22):

And then you can have very, very high quality companies, like Microsoft, Google, et cetera, but they might not be the fastest growing anymore just because they’re so big. And so I’m really trying to find that perfect mix of high quality and fast growing companies. And the way that I think about it is, Hey, if a company’s growing really fast, that shows that there’s really high demand for their product. And that’s what business at the core is really all about delivering a great value proposition to customers.

Ryan Reeves (04:51):

And then the other thing is you want a team that is executing really well. You can be selling dollar bills for 90 cents and growing incredibly fast, but if you’re not executing well and having a clear value proposition for customers and capturing that, then there’s really not a viable business there either.

Ryan Reeves (05:07):

Ideally you can have high growth and high margins, and that’s really a sign that they’re executing well and there’s some signpost of a mote. So that’s really how I think through the strategy. And then there’s other factors like I love founder. I think every company might a portfolio right now is founder led and looking for big industry tailwinds just because you have an industry that’s low growth and it just becomes harder to execute tailwinds, kind of lift your boat a little bit easier. And so there’s just a few things that I look for.

Clay Finck (05:39):

Now, if I remember your background Ryan you answered up the Motley Fool and when I listen to kind of your strategy, you look for those growth companies and you look for the highest quality and that definitely falls in line with the people I’ve listened to from the Motley Fool. So I find that very interesting how many of you have that philosophy where you look for the highest quality companies you can find and hold those for the long term?

Ryan Reeves (06:02):

I would say that there is a strong contention of fools out there that the Motley Fool does really good work and had a great experience learning there. I’m a big fan of Motley Fool.

Clay Finck (06:13):

One of the most difficult parts of investing in these higher growth companies that are very high quality is the valuation. How do you look at valuation? Do you have financial models you use or what type of analysis do you do when valuing and determining yes, this is the right price to pay for a higher growth company.

Ryan Reeves (06:34):

A few thoughts on this topic. And one thing I would say is a lot of times we fall into the thinking where we just want to compare multiples across all companies and say, okay, this multiple’s lower, therefore the company is cheap. This multiple’s higher, therefore this company is more expensive. But that’s really a very simplistic way of thinking. Each business is its own unique thing. And each business has different characteristics. So, okay, maybe multiple’s higher, but this company might be more dominant, the industry might be growing faster. Management might be stronger overall growth and margins are higher.

Ryan Reeves (07:11):

And so you can’t just reduce it down to a multiple. There’s so many factors that I actually look at valuation towards the end of my process, rather than the very beginning because if I’m looking at this company as a unique entity and studying absolutely everything about it, trying to get a holistic picture of what it’s going to grow like and how dominant it’s market position, then valuation is in its proper context then, and you can kind of compare it against other companies.

Ryan Reeves (07:40):

And that’s kind of the problem is we want this nice, easy formula, but if you’re going through the whole process of setting a company and then trying to compare multiples across different companies, across different industries, it becomes a whole lot more complex because there’s a lot more gray area. It’s like, well, how do I value a stronger management team and what’s the magnitude of that strength versus the other company. And how do I in factor that into the multiple? It just becomes a lot more gray area. And I think that that’s the thing that a lot of people don’t really want to deal with.

Ryan Reeves (08:13):

It’s much easier to say, “Oh, Facebook’s at 18 times earnings and Microsoft said 30 times. Facebook’s way cheaper.” And that’s just so much easier to do. And so I think that nuance is really important to think of, but in terms of how I actually just calculate valuation, I try to look five years out, try to get a solid estimate of what I think growth could be and then what I think margins could be and what I think is a reasonable multiple and then sort of discount that back to the future and just see what’s the expected return of that.

Ryan Reeves (08:45):

So it’s really nothing fancy and I’ll do it with different scenarios. So, okay. If they really outperform my expectations, maybe growth is much higher and then that might trickle down to the bottom line. So margins are a bit higher and maybe with those characteristics, the multiple should be a little higher and sort of run different scenarios and then kind of try to put some probabilities on the weight of those scenarios to get like a blended valuation, I think is sort of reasonable. It’s definitely a lot of work, but it’s not like anything too crazy, but I try to look out five years rather than look on a trailing basis. I actually don’t even look at any trailing multiples. I’m always trying to look out forward because I think the market is, is inherently for looking, especially with this type of companies.

Clay Finck (09:30):

I think it’s important you mentioned the qualitative factors. Say for Tesla for example. It’s hard to put a value on… Okay, what’s the value of Elon Musk being the CEO of the company. It’s really hard to factor that into a model and it’s really hard to figure out how much weight the market is putting on that. And I want to touch on Warren Buffet’s number one rule of investing is to never lose money. Part of this rule stems from the fact that if your investment loses 50% of its value, it takes a hundred percent gain to get back to where you started. So are you doing anything to manage risk in your portfolio and ensuring that you aren’t taking excess risk?

Ryan Reeves (10:10):

So I think the main thing that I do around managing risk is position sizing. My position sizing is really based on a mixture of my conviction in the company and how much upside I have. So it’s really conviction, meaning really longer term downside. I think this company is susceptible to serious disruption and the way that I view risk is really permanent capital impairment. Volatility honestly, doesn’t affect how I think about things too much because there’s been multiple times when my portfolio has been down 40% over the past eight, 10 years. And it’s never fun, but I think it is sort of the price you pay when you play in this fear of the market.

Ryan Reeves (10:54):

So yeah, while the math says, “Okay, you’re down 50 you have to get back to a hundred,” some of these companies can go up a hundred percent quite fast. So I think that it’s definitely valid, but Warren buffet also says that you shouldn’t invest in the market unless you’re willing to lose 50%. So there’s clearly, that’s sort of the price of admission to the stock market and it’s never fun when you’re down that much, but volatility, as long as the business is continuing to execute, I try not to let it rattle me too much.

Clay Finck (11:25):

Yeah. You mentioned conviction. And I think that point is really important when investing in these companies that have higher volatility, seeing a 50% downturn is very possible and that might not even be due to drastic changes in the fundamentals. So if you’ve done your research and you built that conviction and a 50% downturn occurs, you know that the fundamentals are still there and the long term thesis is still intact.

Ryan Reeves (11:52):

That’s why I think conviction is so important. If you have no idea why you’re holding what you’re holding and things go south, I would say 50% is maybe extreme for absolutely nothing to happen but during COVID, that was obviously a huge exogenous shock, but things were down 50% that even like software companies that supposedly were going to get a boost from COVID and some of them were down 50%. So you could say, “Hey, there’s actually this out of tailwind, but even they’re down 50%.”

Ryan Reeves (12:25):

I think it’s definitely interesting and that’s why conviction is so important to know exactly why you’re holding what you’re holding and the conviction from all the homework you’ve done rather than you’ve got a stock tip from a friend and you have no idea what this company does, you have no idea what the competitors are, you have no idea if this company is in a dominant market position, so you just have no foundation to stand on and that’s scary. And that’s why you’d be super nervous when stock is down so much. And it’s not like I’m not nervous, I just have a more confidence in the actual people running the business. And I even know them by name and I just understand what they’re doing on a daily basis to sort of move the business forward.

Clay Finck (13:03):

How many holdings do you typically like to have in your portfolio? Some argue that you should concentrate on a smaller number of holdings that you know, very well. Others might argue that you want to diversify into a number of different companies to spread out your risk.

Ryan Reeves (13:19):

I try to be fairly concentrated. So anywhere between eight and 14 companies, actually. I think right now I’m at nine and the reason is I think concentration is important for extreme performance. Actually I used to be much more diversified and oh, this is a company is a tech company and I need to make sure that I have a different industry. Let’s make sure that I’m more sector diversified and what ended up happening is I’d have real small positions that would do very well.

Ryan Reeves (13:51):

And 1% position might triple and added 2% to my performance. And I was like, I did all this research on this company, I have built this conviction and added 2% to my annual return. And at some point I was like, “Why am I starting positions so small and I’m not adding to them?” It’s sort of just this process of frustration sort of led me to a few little rules.

Ryan Reeves (14:15):

I try not to have position sizes that are lower than 3%, even try to do 4% now. And the reason is if I don’t have the conviction in this company and I’m just sizing it small, then either A it’s a no brainer or B I haven’t done enough research on it. And so I think that having enough skin in the game really incentivizes me to know absolutely everything about the company as well. And then it also allows me to when these companies actually perform well, it is a bigger percentage in terms of return for the overall portfolio.

Ryan Reeves (14:49):

And there’s obviously an added risk when you say something big and it goes wrong, but that also really incentivizes you to make sure that you make really thoughtful decisions. So I think there’s a double-edged sword, but overall I’m a fan of concentration just because it makes you stay really sharp and then it also can really add some performance in terms of your portfolio.

Clay Finck (15:12):

So, one thing that has been on my mind recently is inflation. Intuitively I would think inflation could have a negative effect on my stock portfolio because it can lead to higher interest rates and lower valuations. How do you think about inflation and how it relates to investing in these higher growth companies?

Ryan Reeves (15:34):

There’s always a macro factor that’s kind of hanging over stocks and there’s always, honestly, anytime you’re investing, there will be something that people on CNBC are talking about that it’s worrying, whether it’s interest rates were rising, whether it’s a China trade war or Greece going bankrupt, like there’s so many factors just that you can find over the years. And I would say more times than not, they are distracting from the overall process of investing, but inflation is really interesting because of the reasons that you just said.

Ryan Reeves (16:15):

And the way I look at it is if a company is capital light and has really low material costs, then if this company is growing a hundred percent and there’s 3% inflation, is that better than a company that is growing seven percent and has 3% inflation? So it just seems like if you’re growing very fast, it provides almost a contrast in a low growth environment versus companies that are maybe growing much lower they’re capital intensive, they have high material costs. So I’m really not sure exactly where it all plays out. And that’s usually my answer. I just have no idea.

Ryan Reeves (16:55):

But I think that if companies are growing really fast and they’re they’re capital light, then I tend to think that inflation won’t have as drastic of an impact on them. But like you said, we don’t control interest rates and I guess we’ll kind of see where it goes.

Clay Finck (17:11):

Now, let’s talk about Tesla first off. I just wanted to give a full disclosure that neither Ryan or I own any shares in Tesla ourselves. This will just be an open discussion of the company and the bull and bear cases or the stock. And this is a pretty timely interview as just this week in later October, there was an announcement that Hertz is going to purchase a hundred thousand Tesla vehicles between now and the end of 2022. And Hertz the rental car company also stated that they want over 20% of their rental vehicles to come from Tesla. And this sent Tesla stock to over a thousand dollars and the company hit a trillion dollar market cap for the first time in the stocks history. Do you have any comments you’d like to add regarding what we’ve seen from Tesla and the news from Hertz?

Ryan Reeves (18:01):

It’s really interesting. I think that it’s probably likely that other rental car companies will follow suit. It probably just makes a lot of sense. I think that even in the future, as these car costs will continue to go down just because battery production gets better and better. I don’t see why this wouldn’t be another tailwind. We were just talking before the show, this order represents 4.2 billion, which is a little bit less than 10% of Tesla’s total revenue. So this is a serious order. And I think it’s just a validation that Tesla technology is obviously really good.

Clay Finck (18:37):

So one thing that comes to mind when I see this news and how big of a deal it is for Tesla is just the advertising perspective. Like hundreds of thousands, if not millions of people are going to get exposure to Tesla’s vehicles through this rental car service if they’re using Hertz, which is pretty amazing to think about since Tesla does not spend any money at all on advertising.

Ryan Reeves (19:00):

That’s something that I didn’t even really think of but when you get a rental car and you get a Tesla, it’s just free test drives for Tesla all day long, which it can be interesting if you’ve never driven a Tesla and all of a sudden you get one as a rental car you’re like, “Wow, I need one of these.”

Clay Finck (19:17):

I have Tesla drove the Tesla Model S myself. And the experience they provide is absolutely incredible in my opinion. I think that Tesla is just one of those great companies that provide such a unique that you can’t fully appreciate it or really explain it unless you’ve actually lived through it yourself.

Ryan Reeves (19:38):

And I think it’s interesting. There’s sort of meme about Tesla, where it’s like people who are shorting the stock and then people who have the stock and they’re like, “Well, you’ve never driven it.” Like once you’ve drove it, then you to understand sort of the hype around it. So I think there is something to that of, wow, this customer experience is so much superior to a normal driving experience that I think that it’s easy to underweight that, but it’s very important because that’s the core of business trying to provide a superior value proposition. And if you can do that way better than the competitors than that is almost by definition, a good business.

Clay Finck (20:18):

It’s obvious that pretty much everyone knows that Tesla is an electric car manufacturer. Tell us about some of the other things Tesla does and how exactly they’re disrupting the car industry.

Ryan Reeves (20:31):

I think Tesla has some of the most optionality of any company, meaning they can really expand into a lot of other business lines. So the mission of the company is to accelerate the world’s transition to sustainable energy. And you notice that nothing in there, mentions cars. I think that cars are really just the first piece of the puzzle and Elon has even at times talked about how he thinks that energy business can be bigger than car business.

Ryan Reeves (21:00):

And when I first heard that I was really, really skeptical. But I think that if you look into it a little bit, they have solar panels, solar roofs, the power walls, mega pack battery packs so they really have this vision of building a distributed electric utility and they’re even selling some of their softwares. Like there’s one called AutoBidder that utility in Australia uses to kind of manage how they’re routing electricity to different homes.

Ryan Reeves (21:29):

And it’s kind of crazy that the company is so involved in projects like this, but then they have… Even [inaudible 00:21:37] they talked about insurance. So having individual insurance policies for every Tesla driver, depending on your driver behavior, and it’s sort of updating in real time. And so if you’re a super safe driver, you don’t have to get this higher premium to sort of offset the risk of some riskier drivers and the insurance is basically in the pool that the insurance company covers. And so they’re doing some really innovative things there. They even have AI supercomputer named dojo that they’ve been talking about. Maybe we’ll offer this super computer as a service.

Ryan Reeves (22:12):

So there’s all sorts of crazy stuff they’re doing. And I they have the full self-driving, it’s not quite there, it’s still getting rolled out, but maybe they could offer that as a service to other companies. And it’s just crazy the amount of innovation that’s going on at the company. And batteries are getting better and better, cheaper and cheaper cars are charging faster and faster. And so it just seems like there’s so much. If you know the arc investment firm, they’ve been talking about the Robotaxis for a really long time having this distributed network of Robotaxis. And who knows where everything goes, but they’ve really got a lot of irons in the fire.

Clay Finck (22:55):

Now you mentioned many of their other lines of business, but currently the majority of Tesla’s revenue comes from the car business. And I think that really needs to be like the foundation of their company going forward. In preparation for this interview, I was listening to Tesla’s annual meeting and Elon Musk said that Tesla is just as much a software company, as much as it is a hardware company. What do you think makes their cars so special relative to some of the other manufacturers, because we know some of these other car companies are going into the electric vehicle space, they’re prepping for that potential transition in the near future. I would think that they really have to differentiate themselves on the software side like Elon is saying, could you expand on that?

Ryan Reeves (23:39):

It’s really interesting. Especially if you even compare Tesla and the type of people they hire versus a traditional car manufacturer. If you look at the number of software engineers at Tesla versus at GM or Chrysler, it’s not even a comparison. And I think that shows up in things like over the air updates, if you’re a Tesla owner, you can boom, get five more miles of range just by downloading a new software.

Ryan Reeves (24:06):

And it kind of boggles my mind, how that even works and how they can make things more efficient in the car, through the software where you can just download something and boom, all of a sudden you have a performance upgrade. The legacy manufacturers have not cracked that code it’s because they’re trying to sort of rewire cars that have been built so long ago, like the models have been created and it’s just a totally different way of thinking.

Ryan Reeves (24:33):

And so I think that that is what Elon might be referring to when he says that it’s really more of a software company than a hardware company, but at the same time, they spend so much time on the design of the car and trying to get everything right. The crazy thing is Elon talks about time and time again, how hard manufacturing is and that’s obviously the hardware piece of it. And they do so much to try to ramp production.

Ryan Reeves (24:57):

It’s pretty crazy just that what goes into the factories that they have and the automation in the factories but I guess the automation is even software for the robots that are creating the cars. And one of the most impressive things about Tesla to me is how vertically integrated the company is meaning it’s really all the way down. So oftentimes if they can’t find a perfect part for their vehicles, they will actually create the machine to create that new product.

Ryan Reeves (25:26):

They basically are just constantly creating things rather than pulling things in from new suppliers. They do get the cells from Panasonic, they can’t build absolutely everything themselves, there’s just an insane amount of vertical integration, which I think is really, really impressive.

Clay Finck (25:45):

That reminds me a lot of SpaceX. Elon and his crew went over to Russia to figure out, okay, how are we going to get a rocket put together? And Elon tells his guys, “Hey, how about we just build a rocket ourselves?” And they thought he was crazy and before you know it, him and his team were able to put together a rocket for like 10% of the cost of what NASA could do. And just thinking about that and how Elon has these production facilities at Tesla, the guy obviously understands production and how he can increase efficiency, decrease costs, bring things in house and it’s just incredible to think about how he’s done this with not only a Rocket company, but a car company as well. And I wouldn’t be surprised if he would be able to drastically reduce the cost of producing a car at some point in the future.

Ryan Reeves (26:33):

Yeah, definitely. And just to talk a little bit more about the software, it’s pretty crazy. Just the number of miles that Teslas have driven compared to the next autonomous competitor like Waymo or something. I think if you look at, there’s certain estimates between like 500 and a thousand times more miles have been driven in Teslas than Waymo. And it’s just the pure amount of data that they’re getting. And they talk about this a lot. The edge cases where really random things happen.

Ryan Reeves (27:03):

So you’re driving down a freeway and a truck drops whatever’s on the back of their pickup and it’s like, “Okay, what’s the car going to do in that situation?” Or there’s like a jacket draped over the stop sign. It like sort of distorts the stop sign. And it’s like, there’s so many different little edge cases that really make up what is the real world?

Ryan Reeves (27:25):

And it, it’s hard to get all of that data if you’re not having this millions of Teslas that are constantly collecting data and sending it back to the Dojo supercomputer that can then have insights on what the car should do in certain situations. So I would say that there is also a huge flywheel there where they’re getting so much more data than the competitors, meaning the insights are better. And so they can roll that out to the huge fleet and then it just keeps getting better and better. And it’s like this snowball effect. And so I think that’s another piece of sort of the software mode there.

Clay Finck (27:58):

I agree that the data will be very valuable for them going forward, especially if they’re able to collect much more than their competitors. And I wanted to touch on their current market share. Tesla’s vehicle sales currently make up roughly 1% of the market in the US while the valuation of Tesla is more than the top 10 automaker combined. You take all those automaker valuations and combine them, it’s still less than what Tesla is valued at. So I’m curious what you think realistically within say the next five, 10 years, how big of a market share for car vehicle sales can Tesla achieve?

Ryan Reeves (28:37):

I think that I’ve seen that chart so many times as Tesla has kind of grown in market cap, like how many cars, Tesla is selling versus valuation compared to Toyota and all that. And I always, I was sort of missing the point a little bit, as I mentioned a little bit earlier, I think the market’s always forward looking and that chart is inherently backward looking and it’s like, well, are you incorporating all of the massive production feats that Tesla is really creating themselves and the tailwinds of electric vehicles. And it’s easy to sort of look at that chart and say like, “How stupid are you if you buy a Tesla?” But like I said, there’s so much nuance, just some brief metrics. There’s somewhere around 70 million cars that are sold each year. So that’s kind of like the upper limit. And last year Tesla mentioned their goal is to get to 20 million cars produced every year.

Ryan Reeves (29:30):

We’re not exactly sure how long that’ll take. Right now they’re at about a million run rate and so a 20X increase in production is definitely no small feet. They’re going to have to create more gigafactories they just kind of broke ground at Austin and they’re still ramping up giga Berlin. There’s so much that goes into increasing production by a factor of 20 and 20 million cars versus 70 million is roughly like 30% market share. And Tesla says by 2030 they want to be able to produce 20 million cars. So within the next 10 years, that would be theoretically 30% market share, which I don’t think is insanely unrealistic.

Ryan Reeves (30:12):

One thing about Tesla is they set these huge goals, like way higher than anyone thinks, and then they usually miss them honestly. And the thing is, it’s sort of like the, if you shoot for the stars, you lay on the moon sort of thing, where the goals are so high, that they’re really gunning for them and then they end up farther than they would have if they just set like a normal goal.

Ryan Reeves (30:32):

So I think that’s sort of the ethos of Tesla. A lot of times people get freaked out of, they missed production, delivery time and they came in behind the estimates. It’s like, “Well, yeah.” But the estimates are so unrealistic that it’s just hard to kind of keep them accountable to that, but they still just keep tracking on because they do have such high aims. So I honestly don’t know whether the 30% is like in 10 years is the right number, but that’s what Tesla is gunning for.

Clay Finck (31:00):

You mentioned how they shoot for the stars, but they land on the moon. That brings our discussion to Elon Musk and his role in Tesla’s success. He’s kind of the CEO that is really one of a kind. He’s similar to Steve Jobs in that he demands so much out of his people and expects so much for them. It’s been said that he works 16 hour day himself as well. And on top of being the CEO of Tesla, he also runs SpaceX and a number of other companies. Can you tell us more about Elon’s role in Tesla’s success and where he is taking them in the future?

Ryan Reeves (31:37):

I’ve got to say I think I’ve underestimated Elon, even. It’s really quite what he’s pulled off. I think that honestly, he’ll go down as up there with Thomas Edison in terms of the contributions as an inventor and as a person who pushes innovation forward. The thing about Elon is he’s so hands on as well. It’s not like he’s sitting in his office and letting all the engineers do what they do. He is really involved in design, he’s really involved in the actual manufacturing and engineering.

Ryan Reeves (32:09):

So last earnings call, he mentioned that he wasn’t going to do earnings calls anymore and part of me was like, “Oh wow.” And I’m like, I kind of was skeptical. I don’t know if he’s going to just start blowing off Wall Street, but sure enough, this earnings call who wasn’t on there, he lets CFO do much of the talking and he did that so he can be focused more on the product and more on actually moving Tesla forward. And the stock price will obviously follow as we’ve seen.

Ryan Reeves (32:34):

I can’t say enough about how just purely innovative he is. He does do some really crazy things though. There was a couple years ago he had the 420 secured thing, like the funding secured at the stock price of 420. And it’s like, that seems fairly illegal and there was the whole SEC investigation. And so there’s this two sides of the coin, but if you have a person as eccentric as he is, there’s always another side of the coin where you can’t expect him to be like all perfectly buttoned up and like your typical corporate exec it’s like, you can’t really get one without the other. And so I think that’s something that I underestimated for too long.

Clay Finck (33:14):

In thinking about this electric vehicle transition, I believe you’re in the Los Angeles area. I haven’t been to California, but I’m sure there are just Teslas everywhere out on the roads. I visited Seattle recently and saw Teslas everywhere. And I’m actually located in the Midwest. I’ll see Teslas around, but I don’t think it’s really anything like what you’ll see on the coast. Do you think there will be some sort of friction in the transition to electric vehicles at a mass market level, whether that be the time it takes to charge a Tesla or just the resistance in going from a gas vehicle to electric?

Ryan Reeves (33:53):

I honestly think what you mentioned is one of the bigger friction points, even just the charging times, if you’re doing a road trip where you’re going from Southern California to Northern California, you have a range of say 300 miles. And so you drive the 300 miles, but you know you’re not supposed to get it down too low because that’s actually harmful to the battery. So you have to leave like a 20% charge.

Ryan Reeves (34:16):

Then you have 80% of 300 and so you have more like 240 miles and that will go pretty fast. Four hours of driving and then you have to pull off and it might take 30 minutes to charge versus five minutes at a gas station. And so there’s like this small friction that I think people are like, I can’t just get up and go to a road trip with a Tesla. I have to really play out charging stations. And I might be in Nebraska where there’s no charging stations around. And it’s like, “Well, how do I charge my Tesla?” Like you have to be very intentional about your route planning.

Ryan Reeves (34:52):

So I think that that’s actually a big thing, but what people might underestimate is actually that technology is getting better and better. They even just mention that they upgraded their supercharge and there’s improvements in the battery technology that can actually reduce charge times. And so I think it, once you get it down to that same amount of time versus filling up and charging, it’s like, what is the thing that’s really holding you back? Better performance, lower costs, you don’t have to pay for gas, same charge times, it’s like, then it’s more like a ideological thing. It’s like every logical thing is checked off. You just like the sound of your gas [inaudible 00:35:33] but that’s really the only thing that’s like the last bastion. So I think charge times is actually really important that they get that down.

Clay Finck (35:42):

I definitely agree with you. Now there are a lot of things I like about Tesla as a company, but the one thing that has held me back from investing in them is their valuation. At the time of this recording, they’re over a trillion dollar market cap. So when I look at that and I just compare it to other opportunities in the market, I just see better opportunities that I like more just from a risk reward perspective. What do you think about the valuation at Tesla?

Ryan Reeves (36:09):

This is the factor, right? It’s really interesting thinking of the biggest upside scenario. I think that oftentimes with investing, we think about downside so much. It’s like, okay, what are the worst possible things that could go wrong and really an intense focus on the downside? I think that’s very important. I don’t think that there’s the same focus or at least the same extent of the focus on thinking about like, what are the things that could go really right.

Ryan Reeves (36:38):

I think that Tesla has one of the, I mentioned like the amount of optionality that has things could go really, really right with Tesla. And that’s obviously incorporated in the valuation. So if they hit 20 million cars in 10 years and they have the average selling price of $40,000, that’s 800 billion in revenue. That’s pretty wild. This last quarter, they did 15% operating margins.

Ryan Reeves (37:05):

Maybe with some manufacturing efficiencies, they can push that up to 20%. That’s 160 billion of earnings. I don’t know what the correct multiple on that is, even if it’s 20 times, that’s 3.2 trillion in market cap. So that’s a 3X over 10 years, which is certainly nothing [inaudible 00:37:26] that. And that’s only the car business. That’s not even mentioning energy, that’s not even mentioning other things I talked about not even incorporating full self-driving, which is basically pure margin, insurance, which is based pure margin, because they have all the data on individual drivers. So you can sort of see that like, okay, it’s a trillion dollar company, but I mean it could theoretically, I mean it’s not maxed out in terms of its market opportunity. Really the risk is that the valuation gets so large that even with amazing performance for 10 years, there’s no way you can get any returns.

Ryan Reeves (38:02):

And I’m not sure if we’re at that point yet, I guess you can really see that the upside, like if things go really right, the there’s still room for the stock, but there’s obviously the other side of that where traditional manufacturers are really trying to go full throttle into electric vehicles, there’s some upstarts, there’s execution risks. It’s very, very difficult to produce all of these cars. And for a long time, Tesla wasn’t making any money, which was this huge risk of they’re going to have to just keep diluting themselves and diluting shareholders.

Ryan Reeves (38:36):

But as soon as they started making money, we saw the stock go up like 30X. And so that was clearly the main thing that was holding back the stock of is this company going to be even solvent. There was some real worries that Tesla was even going to exist as a company and shorts were really talking about like accounting gimmicks that they’re pulling off that they were trying to make money and I think that that was the key there of if Tesla is actually making money and they’re self-funding, then the upside is virtually unlimited because the existential downside has been limited quite a lot. Unlike with you, I’ve sort of, it always been saying like, “Oh, well Tesla is so much more expensive than traditional car manufactures. It just doesn’t make sense.” But I think I was really missing the big picture of what could really go right about this company.

Clay Finck (39:25):

So when valuing a company like Tesla, a quote unquote value investor might come up with a very low valuation just solely based on the numbers and what they wouldn’t be accounting for is the optionality of the company moving forward. And you touched on this earlier with the insurance, the energy and Elon mentioned that they could sell their autonomous driving software to the other car companies, if it’s easier for them just to buy what Tesla has and because it’s superior and they don’t have to make those investments and develop it themselves since there’s so much optionality, I’m curious, what do you believe are the biggest opportunities for Tesla going forward? There’s just so many different areas they could go into. Which ones do you think are the biggest opportunities for Tesla?

Ryan Reeves (40:12):

It would be really interesting if they started offering their self driving to other companies, it would sort of be like, okay, since if they can get their software into other cars and there’s even that bigger fleet that is improving the data, it kind of seems like game over to me, honestly, because what other company is going to best them in terms of the amount of data that they’re getting. And then it almost becomes like a design preference for customers. It’s like, “Okay, you’re full self-driving so you don’t have to worry about that, but it’s like, what kind of car do you want to roll around in?” It’s really quite interesting.

Ryan Reeves (40:51):

The other thing is even with the energy business, so there’s estimates by 2024, about 2.5% of homes will be powered by solar. And so if you do that math, that’s about 4 million homes in the US and average cost of a solar roof is something like 40 to 50K. So even if you just go off of that, that’s a $200 billion market and these are gigantic markets. Compared to a normal total addressable market, even software companies that are really quite large, they might have Tams of 50 billion, but this is just one piece of Tesla’s business.

Ryan Reeves (41:29):

And just kind of going back to the optionality. There’s so many directions that this company can go in and there’s so many huge markets. The mission is amazing, accelerate the world’s transition to the sustainable energy. There’s so much that can fall under that. And they’re really starting with solar and cars, but it’ll be interesting to see what they dream of one day. I don’t want to get like all fanboy on the company. There’s still a lot that needs to be done in terms of production and it’s right. Of them to focus on cars because that’s the first thing and the vast majority of their money from that. Yeah. I guess we’ll see but there’s quite a lot of optionality.

Clay Finck (42:05):

I would definitely say we’ve talked of the company quite a bit up to this point. And let’s talk about the risks. In your mind what are the biggest risks for Tesla going forward? I’m assuming, you’ve thought about this a little bit since you don’t own Tesla and you like owning higher growth companies like Tesla. So what are the biggest risks you see?

Ryan Reeves (42:25):

One of the things that’s really kept me out of the stock is I thought there was a huge reliance on Elon. So if something happens and he’s spending his time in so many different directions with SpaceX, Neurolink, boring company, like there’s just so many things that he’s doing that I thought that it might be hard for Tesla to continue to just crank out cars. And obviously I’ve been very wrong on that. But I thought there was this huge reliance on Elon especially with some of the things he’s done with that whole SEC investigation like pumping DOGE coin and it’s like, huh. I just don’t know how I feel about that as the leader of this company that is doing so many amazing things, but like I see him on Twitter I’m like, huh, there’s kind of this discrepancy here. But I think I mentioned this, you can’t really have one with that the other.

Ryan Reeves (43:16):

If you have such an eccentric person there, he’s not going to be perfectly buttoned up as your typical corporate executive. And then obviously the other thing is the evaluation, as we talked about. A trillion dollar company, there’s high execution requirements. If the company doesn’t execute, if they don’t get anywhere close to that 20 million barrier by 2030, the stock can go sideways or lose value for quite a long time. So there are really high execution risks.

Ryan Reeves (43:42):

I think one thing that I thought was a bigger risk was competition. There’s always fears about, oh, GM’s going fully electric now and whatever company is starting to go fully electric. And it just seems like there’s such a big distance between Tesla and the competitors. And I think that that’s something that I miss of really focusing on that and that being a determining factor. So yeah, there’s valuation Elon sort of risk and then execution risks. Manufacturing is an incredibly hard problem. I would say those are kind of the main ones.

Clay Finck (44:18):

Tesla has bet big on China as they are building a giga factory there. And China is also a country that has banned companies like Google and Facebook from even operating there. Is there a chance that China cracked down on Tesla so that the Chinese government can prevent them from gaining a substantial level of market share?

Ryan Reeves (44:40):

I think it’s certainly quite possible. So there’s other Chinese manufacturers out there like Neo and I just think that the Chinese government has made it fairly clear that they favor their own companies rather than foreign companies. So I think that the fact that Tesla has a giga factory in Shanghai is really important that they’re highly aligned. It’s not like they’re just shipping cars in and I think that the Chinese government would probably frown upon that a little bit more, but it’s interesting that you bring up and one that I think should really be thought about deeply if you’re a Tesla investor, because I’d say it’s quite possible. It’s hard to know and exact probabilities, but yeah, it’s definitely something to think about.

Clay Finck (45:23):

It seems like almost every few months I see something in the news where there are Tesla recalls and it’s just like thousands of vehicles are being recalled. And I wonder, do you know if that could hurt the company substantially from a financial standpoint?

Ryan Reeves (45:40):

I guess it would be the number of recalls. So just in terms of the total fleet, I don’t know how many cars are being recalled in most of these reports. And yeah, it’s definitely possible. I think that another thing that you see in the news a lot is some person who’s on autopilot in Tesla and unfortunately crashed and so Tesla should be held liable for that.

Ryan Reeves (46:07):

And it seems like time, time, again, they’ve sort of, as the details have come out, it’s like somebody is sleeping or not really paying attention and they say that you need to be paying attention. It’s not like completely autonomous yet. So I think that there are sort of a lot of news headlines that come out but I think that that’s also one of the risks as we transition to autonomous driving. Unfortunately, so many people are killed in car accidents and if you just look at what’s possible, I think like it’ll be maybe 50 years from now our grandkids will say like, how on earth did you guys let each other just drive cars and have all these accidents?

Ryan Reeves (46:46):

It would be almost viewed as barbaric if we have autonomous driving and basically zero accidents. I would love of if that happened because it would show that the pure amount of deaths would go down exponentially. I’m hopeful but I think that there’s a lot of news headlines that obviously will take place from here in that hopeful future,

Clay Finck (47:08):

At the end of each episode, we like to have a segment called the action plan. In the segment that we like to ask the guests three questions that can create an action plan for listeners to do when they’re done with the episode. So the first question, which habit or principle do you follow in your life that has had a big impact on your success that not enough people do, but should?

Ryan Reeves (47:31):

That’s a great question. I think one thing I try to do, definitely not always successfully is just take the other side of the argument just for fun. So like Tesla I don’t own the stock, but trying to think of the most bullish case, just for fun to try to like almost stretch my mind or a company that I really like try to look at the most bearish possible case to just, I think so often is easy to get locked into tunnel vision. It’s like what I think and what I see is correct and that’s the only way versus just taking the complete opposite of that argument. I try to get in that habit and it’s really uncomfortable quite honestly, but I think if you do it enough and kind of exercise it, it can be really helpful to see things from different angles.

Clay Finck (48:19):

I really like that. Confirmation bias is something that’s very real. If you’re the biggest Tesla boy you might only read content from people that are also Tesla balls and if someone has a legitimate case for why the company might not do so well in the future, then you’re likely to try and avoid that content. So I really like that and how you get both sides of the argument.

Ryan Reeves (48:43):

Thanks. It’s kind of crazy. Like if you read something that you really disagree with, you automatically almost think of this person as like a bad person. It’s like, you have no idea what the character of this person is. It’s just like they have a very different worldview than you. That doesn’t mean they’re a bad person at all. You have to like sort of separate the person from content and it’s just as humans, we are a super, super bad at that.

Clay Finck (49:06):

What has been the most influential book in your life? It doesn’t have to be you your favorite, just the most influential.

Ryan Reeves (49:13):

My faith is really important to me. So it’s kind of like the [inaudible 00:49:17] answer, but I’d say the Bible is definitely the most influential. But investing related, I would say is One Up On Wall Street by Peter Lynch. And that really got me fascinated with stock market and tons of great real life examples.

Clay Finck (49:30):

So when this episode is over, before the listener quickly jumps to the next podcast, queued up in their player, what is one action that they should take to help improve their life, career, business, or just their investment strategy?

Ryan Reeves (49:45):

I think that one practical thing is keeping a decision journal. So whether it’s actually like a physical journal or just a note on your phone or your laptop of all the decisions you make. So investing is a really easy example of every trade you make, write down exactly why you made the trade.

Ryan Reeves (50:05):

And so this is pretty humbling actually, because let’s say the stock doubles and it goes up for a completely different reason than you set. It’s like, “Okay, the results say I’m right, but I was actually wrong.” So if you look at this decision journal over time, it really just shows you how over confident we can be. So I’d say that just track your decisions and it will help you also remember obviously why you made the decision and then it can be kind of humbling or if you do get it right, and then you can update your process and say, “Okay, that was actually a good decision and here’s why I made this.” And so you can sort of build this pattern recognition because we can fool ourselves very easily.

Clay Finck (50:45):

Ryan, thank you so much for coming on to the show. I really appreciate it. TIP does too and I really enjoyed this conversation around Tesla and your overall investment philosophies. Before we close things out, where can the audience go to connect with you?

Ryan Reeves (51:00):

So if you just type in Investing City, you’ll find my website and you can also find me on Twitter @investing_city, DM is open so feel free to reach out. I always love talking to people.

Clay Finck (51:13):

Awesome. Thanks so much. We’ll be sure to link those in the show notes. Ryan, thanks so much for coming on.

Ryan Reeves (51:19):

Thanks so much Clay.

Clay Finck (51:21):

All right, everybody. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can do get these episodes [inaudible 00:51:28] automatically. And if you haven’t already done so be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources we have as well as some tools you can use as an investor. And with that, we’ll see you again next time.

Outro (51:44):

Thank you for listening TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses go to the investorspodcast.com.

Outro (52:05):

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