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.

Finweek English Edition - - MARKETPLACE - Edi­to­rial@fin­week.co.za Iwan Swiegers is a di­rec­tor at Capilis As­set Man­agers.

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.

Valu­a­tion

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.

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