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Tesla and the merits of story investing

June 23, 2020

Tesla/ TSLA Buy @ $1590 MV: $295bn Employees: 48,016 Next figures: 27 October

When I woke up this morning I was thinking about Tesla and I had these particular thoughts in my head; I had the idea of six characteristics of really great growth shares. I am listing them below. I expect some of you will find some of them surprising.

1. Explosive growth
2. A soaring share price
3 Huge ambitions
4 Wildly over-valued by all conventional stock market metrics
5 Facing massive competition
6) Climbing against the background of a Greek chorus of sceptics, disbelievers, detractors and the outright hostile.

I am going to look at Tesla, first as to how it stacks up on these six criteria and then I am going to look at what I increasingly think is the most important thing about any great growth share – the story.

1 Explosive growth – Tesla is forecast by analysts to grow sales from $11.8bn for calendar 2017 to $50.1bn for 2022 and ebitda (earnings before interest, tax, depreciation and amortisation, a measure of operating profitability) from $528m to $9.11bn over the same period. If I didn’t know it would never have occurred to me that this performance was being delivered by a car company.
2 A soaring share price – The price is up roughly 80-fold since the summer of 2011.
3 Hugely ambitious – the CEO and founder is Elon Musk. Is there any limit to this man’s ambitions? Disrupting the world’s car industry is just for starters.
4 Wildly over-valued – I have just done the sums and Tesla is worth the same as Toyota + BMW+ Mercedes-Benz+General Motors. In the year to 31 March 2020 Toyota made 8.8m vehicles. If Tesla is very lucky it will make 500,000 vehicles this year. Only Ford made more units than Toyota. Tesla is valued at over 10x Ford. More conventionally Tesla is on a prospective PE on forecast 2020 earnings of 322.
5 Facing massive competition – every man and his dog including all the automotive giants mentioned above is planning or making electric vehicles and hybrids.
6 A Greek chorus of sceptics and disbelievers – it is very rare to read about Tesla in a financial markets context without the adjective, ‘overvalued’ attached. In the same way as it never occurs to anyone connected with the BBC that anyone who voted Brexit is not some kind of far-right nationalist ultra so the financial community and certainly the media seem to assume that only retail investors who don’t have the faintest idea what they are doing would buy Tesla shares. There is a share trading platform in the US called Robinhood. Reportedly some 50,000 investors a day are piling into Tesla shares. The bien pensants naturally assume they are morons; the same sort of people who buy popular books and watch popular films.

The problem for all the clever clogs, who never have and never would buy Tesla shares, is that all the structures you can make about Tesla and its wonderfully eccentric CEO could have been made at any time in its stock market journey. The shares have always looked insanely overpriced.

So why would anyone ever buy these shares and particularly why would anyone buy them now! Well, here is why I would buy them – because they have got the most incredible CEO and the most spectacular story, one so exciting you could hardly make it up!

Before going on with that I want to deal with another issue. If what you want is lots of cars for your money why not buy shares in Toyota or Ford. They are not expensive. They are cheap as chips; in fact, it is obvious from looking at their share price charts that you can hardly give them away.

I think there are three reasons. First, Toyota has nearly 400,000 employees, who know how to make fossil fuel cars. What are you going to do with them, when nobody wants fossil fuel cars any more? Second, what are you going to do with all those clunky factories designed to make fossil fuel cars and the vast hinterland of suppliers, who depend on those factories. Third, last and maybe most important of all – how are you going to make the huge shift from a culture built around engineering to a culture built around innovation. How, in a nutshell, are you going to turn BMW into Apple?

We know it is not easy because Mercedes-Benz tried. In 2009 Mercedes bought 10pc of Tesla for $50m and helped them develop the Model S in exchange for access to batteries. The collaboration didn’t last because Mercedes couldn’t cope with the whole Tesla way of doing things. They wanted to test things for years before going live. This was way to slow for Musk and California so they parted company. Like many others they never imagined that Musk and Tesla could get from where they were then to where they are now, let alone where they might be in 10 years time.

A pointer to how things might develop is that Toyota overtook General Motors in market value over a decade before it actually made more cars than the Detroit giant. Now Tesla has overtaken all the old school car giants in value and may also be a decade away from overtaking them in production.

My feeling is that Musk and Tesla have done the hard part, which is taking a start-up to production of half a million cars a year with a business that is profitable, cash flow positive and with a brand that already has great global recognition and is as aspirational as Apple’s brand.

One of the reasons for not buying exciting shares according to one observer is a phenomenon called ‘analysis paralysis’. People over think problems and don’t accept simple answers, which are staring them in the face. I am going from that extreme to another. My theory is that Tesla really is the automotive equivalent of Apple, with one huge difference. Apple designs and markets in-house and outsources the manufacturing. Tesla does some outsourcing but also does a huge amount of the actual making in-house at its famous gigafactories.

Tesla is so vertically integrated that it makes the batteries, makes the cars, sells the cars and even supplies much of the charging infrastructure. This has been necessary because time and again Musk and company have been blazing trails down entirely new pathways. Like Bezos at Amazon they keep on having to invent wheels that didn’t exist before they created the demand. This is innovation on an epic scale and it is giving rise to some huge corporations. I believe Tesla is going to be one of them.

My best guess, wild speculation I admit, is that at some point Tesla is going to overtake Amazon, Alphabet, Apple and Microsoft and become the biggest business in the world.

There are three drivers to this process. First it is going to make electric versions of every mode of transport from compact cars, the Model C, to semis, due to go into production in 2021, vans (a huge market planned for some time in the next couple of years) and then everything else you can think of including people carriers (transparent vans with seats), which may travel at vast speed on underground pipes between cities. Whatever; it seems obvious that Tesla is going to keep ramping up production into the millions and then the 10s of millions. (In 2019, globally 65.5m vehicles were sold).

A second key driver is going to be the solar panel/ battery utilities business supplying power to houses and offices. This business is growing, benefiting from rapid technological advances and according to Musk will eventually be bigger than the transportation business.

Third, like Apple, as Tesla builds its global eco-system of devices, the plan is to develop a service business, which again Musk expects to deliver high profit margins, even higher than the industry-leading profit margins he is promising for the automotive manufacturing business. As an example he has already talked of creating a fleet of 1m robotaxis, where Tesla would generate recurring income (highly valued by investors) from renting rides – transport as a service TaaS).

This is the Holy Grail activity (TaaS) that one sophisticated professional investor has forecast will take Tesla to $7,000 a share. My forecast, reading through from my market value forecasts and assuming no further equity fund raising, is for the shares going to more like $12,000 each.

I freely admit that this is all wild speculation but it is just such speculation, much indulged in by Musk himself, which has been far more useful than wet towel analysis in forecasting the share price so far.

One way of thinking about the shares is as an investment not so much in hard facts as in a heady mixture of adrenaline and news flow. Almost every time Musk opens his mouth he comes up with some amazing new idea but what is even more amazing is that it would be a rash man (as many short sellers have learned to their cost), who would bet against some of these seemingly far fetched speculations coming true. (Robotaxis seem like the stuff of science fiction but will that still be the case in five years time).

When Musk announced his first gigafactory that seemed a typical piece of Musk bombast but listen to this from the latest (22 July) quarterly report.

“We are continuing to build capacity for Model Y at Gigafactory Berlin and Gigafactory Shanghai, and we remain on track to start deliveries of these vehicles from both locations in 2021. The next US Gigafactory site [in Texas] has been selected and preparations are underway. Tesla Semi deliveries will also begin in 2021. We continue to significantly invest in our product roadmap.”

Bottom line, as Musk noted, in 2021 the company will be simultaneously working on building three gigafactories. And it makes so much sense. As Musk has said why transport heavy vehicles between countries and continents when you can make them, where you are going to sell them.

Last but not least I have noticed, even ahead of the much-trumpeted ‘battery day’ coming on 22 September that Tesla cars are increasingly similar to iPhones with wheels which you can sit inside. They ought to be cheaper to build, maintain and run than fossil fuel vehicles as well as saving the planet and once they are it is surely going to be game over for the latter.

Tesla is in my list of ‘must-owns’ for a reason. I see them as one of the world’s great growth shares – classic 3G with tons of magic and something new coming along again and again. Just close your eyes, forget old school stuff about valuations and buy the story.

I have picked Tesla because they are such a textbook example of an exciting company that looks wildly over-priced. There are many other examples – so many that I increasingly regarded looking over-priced as a key characteristic of an exciting share.

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