Buying into the vision of a better world
Automaker and energy storage company Tesla is not a widow-and-orphan kind of stock, but a number of things would have to go terribly wrong for this company not to change the world.
teslawas co-founded by the South African-born visionary and pioneer Elon Musk. The company designs, develops, manufactures and sells electric vehicles and energy storage products. The Model S sedan is the fastest production car in the world (0 to 60 miles per hour (97km/h) in 2.5 sec). Tesla currently produces three cars – the Model S, the Model X and the Model 3. Tesla has installed a network of high-powered “superchargers” across the US, helping to counter the negativity surrounding electric cars and easing the public’s fear of being left stranded somewhere with a flat battery.
The company’s energy storage products include the seven kilowatt-hour (kWh) and 10kWh Powerwall for residential applications, and the 100kWh Powerpack for commercial and industrial applications. Tesla manufactures its products primarily at its facilities in Fremont and Lathrop, California; Tilburg in the Netherlands and at its Gigafactory near Reno, Nevada.
It also recently acquired SolarCity in an all-stock deal of about $2.6bn. The deal doubles Tesla’s workforce to nearly 30 000 employees and creates a unique combination of solar, power storage and transportation.
Why we like it
The main investment thesis lies behind Tesla representing not only the future of motoring, but the future of electrical power and how it impacts every aspect of our lives. Tesla is ahead of the curve when it comes to design aesthetics, build quality, technology and just “making it work” as a complete package. The fate of the company effectively hangs on the new Model 3, the car that Tesla is aiming at the masses. This car is cheaper and smaller, with easier design and build specs than the current models. As production ramps up, economies of scale will start to kick in, paving the way for profits to start coming through. Something must go terribly wrong for the Model 3 to be a flop.
Something must go terribly wrong for the Model 3 to be a flop.
What key risks have been identified?
The main risk lies in a complete cash-burn, i.e. non-profitability continuing into the next couple of years. As we mentioned above, the Model 3 is the alpha and omega for the company and should bring substantial top-line growth (revenue) to the business. The company can’t be valued on current fundamentals as there simply aren’t any fundamentals to talk about. This leaves the door wide open for stock price swings due to market sentiment. Regulatory hurdles, as well as lawsuits arising from an incident being caused by the company’s autonomous technology, could seriously damage Tesla’s credibility going forward.
Given its current fundamentals, there isn’t really a valuation that can be placed on the share. We are buying into the vision of Tesla as we believe that the company has the ability to change the world for the better. The share price movement will be watched carefully, as well as production updates – this will provide us with some guidance on the market sentiment and the subsequent direction the share may take. As they say, this is not a share for widows and orphans and only comprises a small percentage of our model portfolio.