This Famous VC Thinks Tesla Could Be the Next Apple

A year after announcing a big bet on Amazon, Silicon Valley investor Chamath Palihapitiya returned to the Sohn Investment Conference Monday with what he called a more controversial pick: Tesla.

Palihapitiya, a venture capitalist turned hedge fund manager who is also a former Facebook executive, has built up some credibility since his first appearance last year at the conference, which benefits pediatric disease research: Amazon stock is up some 34% in the meantime.

In typical VC fashion, Palihapitiya, founder and CEO of Social Capital, said he is looking for his next opportunity to get a 10x return in 10 years, akin to what Amazon amzn has delivered for shareholders. And he acknowledged that investors attending the hedge fund conference at Lincoln Center in New York, were likely to be skeptical that Tesla tsla could be that 10-bagger.

“Half the people in this room probably think it’s one of the best companies in the world, and the other half probably think it’s something close to either a fraud or bankrupt,” Palihapitiya said. The crowd audibly murmured when he confirmed that “the company we’re talking about today is Tesla.”

To say that Tesla’s stock is a contentious issue for investors is an understatement. A sizable contingent of hedge fund managers are shorting Tesla, or betting that its share price will fall, including some who have also presented on stage at the Sohn Conference, including famed short-seller Jim Chanos of Kynikos Associates, who has called Tesla the “anti-Amazon.” Even the electric car maker’s CEO, Elon Musk, has weighed in on the debate more than once, trolling short-sellers on Twitter recently when Tesla stock rose.

The problem, Palihapitiya said, is that Tesla, with its pursuit of unprecedented technological advances from its Gigafactory to Musk’s other side endeavors including his tunnel-digging “boring company” and Neuralink, defies understanding and traditional investment valuation methods. “We took the good, we took the bad, we took the ugly and we tried to model the business. What we found was insightful: That it’s absolutely un-modelable,” Palihapitiya said. Anyone who recommends going long or short Tesla, he added, “is completely making it up.”

Instead, he looked for a “historical analog,” and made a discovery: “What we do know is that the early trajectory of Tesla is really close to the early trajectory of Apple,” he said.

Apple was once a marginal player in the personal computer market, an underdog next to IBM and others, and a company that many investors believed would never be a dominant force in any type of technology. But the Apple iPhone changed everything, Palihapitiya explained, allowing Steve Jobs’s company to quickly lay claim to the lion’s share of the fragmented cellphone market, expand into other products such as the iPad, and generate massive profits as their competitors were forced to discount their own products. “What Apple did was create a tailwind of demand,” Palihapitiya said. “Now let’s ask ourselves, is Tesla running the same playbook?”

Tesla’s electric cars and other new-of-their-kind inventions may very well do what the iPhone did for Apple, he said. “The point is, there’s a lot of other things that are in the offing here that we don’t even know about,” he said. Already, Tesla is developing “what I think is probably the single most impressive advancement in software and sensors: autopilot,” he said—an option for Tesla cars that is so profitable it has “a 100% gross margin.”

The bear case, of course, is that Elon Musk won’t be able to bring his many futuristic ideas to fruition, or that the execution will be so expensive that Tesla will run out of money first. “If there’s one thing we can agree on, whether we agree with the strategy or not,” Palihapitiya admitted, “[it’s] that this is an incredibly capital-intensive endeavor.”

Those caveats make Tesla stock particularly volatile and risky, so Palihapitiya isn’t investing in it the usual way. “It’s very difficult, from our perspective, to be naked long or naked short the stock,” he said. What he’s buying instead: Tesla convertible bonds for the year 2022.

Convertible bonds are securities that pay interest, but give the bondholders the right to convert them to equity shares; they’re basically a way to bet on the growth potential of a company without taking the risk of buying common shares. Investing in the bonds means that as long as Tesla is worth about a quarter of its current value, “We’re guaranteed not to lose money,” Palihapitiya explained. If nothing else, Tesla’s underlying assets are likely to be worth at least $15 billion, the floor at which Palihapitiya would just break even. “Even if the equity goes entirely to zero we’re protected,” he said.

Still, Palihapitiya thinks it’s likely that he’ll do much, much better than that. Tesla, he expects, will eventually represent 5% of the world automobile market. If Porsche or BMW are any guide, he explained, that means in 10 years Tesla could be worth more than seven times its current value, or about $336 billion. The Tesla convertible bonds allow him to capitalize on the stock opportunity too. “On the off-chance that this guy pulls it off, we get 95-plus percent of the upside,” he said. (Palihapitiya’s presentation did not move Tesla’s stock price, which ended the day slightly down.)

Essentially, he sees Elon Musk as a lottery ticket: “While we’re trying to figure out how to get an Uber to Lincoln Center, he’s trying to figure out how to get a rocket to space,” Palihapitiya said. It’s worth investing in Tesla, he concluded, “to stand shoulder-to-shoulder with a man we think is our generation’s Thomas Edison.”