Elon Musk’s Tesla, SpaceX: Assessing the investment case – legendary investor Ron Baron

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Tesla is sporting a market cap of $800 billion, which is more than seven times the combined sum of Ford and General Motors, notes BizNews Premium partner The Wall Street Journal. That valuation is paired with a minuscule share of the global auto market. So what’s next for Tesla, and other Elon Musk companies? Hear Ron Baron, founder of Baron Capital Management, share why he invested in Tesla early and why he expects the company to do well in the foreseeable future. He also explains that he has been selling Tesla stocks of late to bank some profits and ‘it’s painful’ every time he has sold – because the price has kept rising. – Jackie Cameron

Ron Baron on Tesla stocks:

We bought stock in Tesla. We spent U$385 million between 2014 and 2016 buying eight million shares eight million and one shares. The average price is U$40, U$42 a share. It’s now U$860 or U$850. So it’s now [at] U$850 billion market cap, it was U$42 or U$45 billion when we started. When we bought it, I thought that we would make 20 times our money. We’ve made 20 times our money so far, and I think that it’s going to be a U$2 trillion company over the next eight or 10 years. That’s U$2,000  a share. Can we get lucky? Yes, I can get lucky. [When] the first autonomous driving takes off the way I think it could be, that could be worth another U$500 billion or trillion dollars.

On SpaceX:

We’re an investor. We own a little bit less than 1%. It’s a private company. The value on it is U$40 billion maybe. That was where we started with Tesla. I think that SpaceX is on the way to U$2 trillion dollars also. I think that in Tesla, we’re going to make a triple in 10 years. I think that in SpaceX, we’re going to make 30 to 50 times in 10 years.

One of the big reasons for that is that in the 1960s, when President Kennedy said they were going to the moon, and the rockets that he used were disposable – U$100 million rockets, U$200 million rockets – they used one time and then it burns up. With SpaceX, the competitive advantage that they have is that they use the rockets over and over again. So the fuel to get into outer space – maybe an orbit – maybe U$500,000-U$1 million. The rockets are U$100 – U$200 million. They’re throwing away U$120 million instead of just spending the fuel over and over again.

On other non-public companies the Baron Fund invests in:

We own Rivian, which is another electric car company – a small portion of that – and that’s owned 20% by Amazon. We have a small position in that. We’re just investing right now in Cruise. That’s another private company that’s going to do a car service with the autonomous driving in San Francisco. Very shortly, that’s about to start.

The big problem with electric vehicles is where are the batteries coming from? This company Goldman Sachs sponsored in Volkswagen is the big customer for making these batteries in Europe and using Norway hydropower. Then a farmers network to allow farmers to get better seed at lower prices. We’re investing in that. So we have a bunch of small investments, but we have a bunch of investments that we invested U$10-U$20 million, that are worth U$200 million – U$300 million.

I had sold a little bit of Tesla, and I wanted people to see what I’m doing, so they don’t think that I’ve died and the only reason we still own Tesla is because I’m dead. I put a note up on our website [that] said what happened is that it became a very large percentage of a few funds that we manage – Baron Partners Fund, Baron Focused Growth fund, one offshore fund that we have – and so as a result of that, I decided it would be prudent for me as a business owner, not just as an investor in a company, to show people that actually we do take profits on occasion.

 

When Tesla comes along, I said, ‘this is going to be this monster company’. I went to the board and I said, ‘in 2014 to 2016, I bought all the stock I could buy for a couple of funds that I manage and most of the mutual funds at Baron Capital – which are, real estate, health care, fintech, emerging markets or small cap – they can’t own Tesla. A couple of guys who could own it, I tried to persuade them and I wasn’t successful.

So I said I’m not taking anyone’s opportunity. If I invest in this, I’m not going to do it personally. But I’d like to pay U$50 million on behalf of Baron Capital and invest in Tesla. I think I can make a U$1 billion on it and I can afford to lose U$50 million. It wouldn’t be pleasant, but I can afford to lose it. But I can’t afford not to make a billion. If I do make it, I’ll give some of the profit to people who work at Baron Capital.

In addition, Baron Capital would just be stronger and my goal is to make it last for 100 years. I wanted to have a stronger balance sheet – even stronger than it does now. They gave me permission. I said, ‘I’m committing and I will be the last person to sell’. I’m not going to sell anything until all the shares are sold by all of my clients.

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