2021 Grand National: Why horses for courses applies to the investment world
With a history dating back more than 180 years, the Grand National is undoubtedly one of the biggest...
Tesla, the electric vehicle maker, will be added to the S&P 500 later this month.
Currently worth more than $616 billion*, on Monday 21st December it will become the 6th largest company in the US stock market index, behind only the big five tech firms.
With more than $4.6 trillion** currently invested in US index tracker funds, thousands if not millions of people will automatically become investors in the company. But with its price having risen more than 650% year to date (it started the year valued at around $80 billion), are these investors coming in at the wrong time or does the company still have more to give?
We asked the three Elite rated managers who own the stock, about their view on the company:
Jeremy Podger, manager of Fidelity Global Special Situations fund
“We were right to be cynical on Tesla over the past few years for a number of reasons, including cash flow, governance, management turnover and concerns about product quality. However, the very clear turnaround in its Q3 2019 numbers made us more positive on this electric car maker.
“The in-depth due diligence done by Fidelity’s automobile analyst and the meeting with the company’s management (at the NASDAQ conference in London) in early December 2019 were the two main catalysts for strengthening our conviction and for Tesla’s addition to the fund.
“The stock has had a significant run since then, while the company’s execution has been strong on all fronts. In the course of this year, it has successfully tackled supply issues, shown strong deliveries in China as its Shanghai factory ramped-up scale, and it has become clear that while competitors have been investing heavily, Tesla retains a technological edge – crucially not only in terms of the product itself but also in its production process, which is highly efficient and far less capital intensive than is typical in traditional auto assemblers.
“In addition, Tesla has outlined its strategy for production of the next generation of its batteries, with plans to ramp production to a scale that would imply that in time it could be supplying third parties in the auto industry and possible more generally for electricity storage.
“Finally, it is now talking more openly about its plans for a mass-market model which could accelerate its market share gains. In the event that Tesla meets its longer term production targets, it should produce volumes and revenues that could adequately justify its huge current market value, assuming that it retains the production cost advantages that it appears to have over competitors. But these volumes are still some way off and this year the market has implicitly become more and more far-sighted in its anticipation of future earnings.
“In summary, we think that Tesla has certainly been caught up in the trend this year to look at hyper-growth companies with more and more regard for long term potential and less regard for shorter term earnings. That is a market phenomenon which in our view has gone quite far enough. And that is also why we have periodically taken profits in the position and made sure that the position size is commensurate with the (very high) volatility of the stock.
“However, there is a very solid and compelling case for real profitable growth at Tesla. In the auto industry, lead times for products are long and technology persistence is more durable than in most areas of technology, so in many ways the ascendance of Tesla this year can be seen as arguably more justifiable that that of many software and internet companies.”
Chris Ford, manager of Smith & Williamson Artificial Intelligence
“Tesla obviously isn’t a Covid beneficiary in the way that say Microsoft or Ocado have been, but it has a huge advantage over peers as it is starting with clean sheet designs rather than trying to shoehorn electric powerplants into existing (petrol or diesel) models.
“This gives Tesla a significant advantage over the Daimler/BMW/Audi et al where model cycles take years, not months. Existing manufacturers still have a lot of capital tied up in diesel autos, a market which is dying. Petrol and petrol hybrid cars will go the same way, albeit that may take a bit longer.
“Moreover, Tesla’s strong battery technology will have applications well beyond autos; if you think about what Covid has done to the world more generally, I think it’s fair to say that most people want to see a better/fairer society post Covid, with cleaner tech and, crucially, cleaner energy – Tesla can play a big role there and that’s probably not fully appreciated yet.
“Lastly, it’s also worth highlighting that whereas the market used to see Tesla as just a disruptor (and a fairly novel one at that), there’s now better understanding of the business model and, specifically, there’s a further tailwind from the recurring revenue streams associated with say in-car audio & entertainment or performance upgrades.
“Recurring revenues generally haven’t been a feature of the auto industry in the past – the general idea was that you would buy a car, wait for the finance deal or warranty to run out, and then buy another. Recurring revenues help to reduce the cyclicality of the business and thus the volatility of earnings.
“Recent strong performance has been driven largely by the news that it is going into the S&P 500 at full weight on 21 December. S&P reckon that this change alone will drive around $72.7bn of required trades in Tesla so that the passives and ETFs can get to the correct weight. Given the very strong performance we’ve been taking the position down, but structurally Tesla remains in a good place.”
Tom Slater, co-manager of Scottish Mortgage Investment Trust
“Tesla’s success has been earned over a period of ownership extending back to 2013 and, as with most successful investments, we have endured large drawdowns in its stock price on the way to the current position.
“Tesla has made significant operational progress. It has successfully added capacity and the production ramp of its latest model has progressed far more smoothly than for any of its previous vehicles. Demand for its products is strong and the response from its traditional competitors remains muted. It is still our largest holding even though we sold over 40% of our shares during the period [to 30 Sept 2020, raising £1.18bn] to ensure that the portfolio has an appropriate level of diversification.
“Love them or hate them, electric cars are here to stay. Since the start of this year we have seen gathering evidence of one of the most significant societal and investment transitions of our lifetimes – the wholesale shift away from carbon. Depressed (and even negative) oil prices support this thesis, as does the observation that in the first quarter of 2020 the Tesla Model 3 was the bestselling car in California, the place that so often provides a window to the future.
“The cost of solar power is decreasing; battery power is improving; and storage costs are falling with battery density simultaneously rising. These factors, combined with huge investment and ever-increasing knowledge, mean that the transition to renewable energy and electric vehicles is now irreversible.”
*Source: CompaniesMarketCap.com, 9 December 2020
**Source: S&P Dow Jones Indices.