Car­maker is worth $300bn but fears grow its run isn’t sus­tain­able, writes Olivia Rudgard in San Fran­cisco

The Daily Telegraph - Business - - Front Page -

Tesla’s nose­bleed-in­duc­ing rise in share price shows no sign of slow­ing down. From lows of $185 (£145) last May, the com­pany’s shares reached new highs of $1,643 this week ahead of its cru­cial sec­ond-quar­ter earn­ings today. Long doubted and dis­missed, it has now posted three con­sec­u­tive quar­ters of profit, in­clud­ing one that took it through a global pan­demic. It is worth $300bn, the most valu­able car com­pany in the world, and it at­tracts de­voted fans like no one else.

Its suc­cess is of­ten pinned on Elon Musk, the charis­matic chief ex­ec­u­tive, and the com­pany’s early adop­tion of the elec­tric ve­hi­cle tech­nol­ogy that is be­com­ing in­creas­ingly main­stream amid wide­spread in­cen­tives push­ing car­mak­ers away from gaso­line.

Tesla also oc­cu­pies a unique po­si­tion in the mar­ket. It’s a green com­pany, but also a man­u­fac­tur­ing com­pany and a tech­nol­ogy com­pany. This means it at­tracts in­vest­ment from all three sec­tors, and can cap­i­talise on a resur­gent in­ter­est in “green” stocks.

In­ter­est in funds and shares driven by ESG (en­vi­ron­men­tal, so­cial, gov­er­nance) pri­or­i­ties is grow­ing. Data from fi­nan­cial ser­vices firm Morn­ingstar showed that the first quar­ter of this year was a record one for sus­tain­able funds.

Does Tesla’s unique po­si­tion leave it vul­ner­a­ble as the mar­ket it now dom­i­nates be­comes in­creas­ingly com­pet­i­tive? Many legacy au­to­mo­tive com­pa­nies have elec­tric cars com­ing out this year or next, and a host of start-ups are snap­ping at its heels.

Dan Ives, of Wed­bush Se­cu­ri­ties, thinks the stock has fur­ther to climb. The most op­ti­mistic pre­dic­tion from his firm has the com­pany at a $2,000 tar­get. “It’s a sup­ply and de­mand is­sue. Tesla con­tin­ues to be the main game in town when in­vest­ing in a green way,” he says.

“Over the com­ing 12 to 18 months, there’s go­ing to be more com­pa­nies that play into the space. I think for Tesla it’s an op­por­tu­nity and also a chal­lenge at the same time.

“They’re miles ahead of the com­pe­ti­tion, but they have a tar­get on their back in terms of go­ing af­ter what’s go­ing to be a tril­lion dol­lar mar­ket over the next decade.”

Con­fu­sion reigns over whether Tesla can truly be con­sid­ered an eth­i­cal stock. It is push­ing the world to­wards elec­tri­fi­ca­tion, but some rat­ings agen­cies score it less well on its trans­parency, gov­er­nance and HR poli­cies. The com­pany be­gan re­leas­ing im­pact re­ports in 2018, but some an­a­lysts still think it could be more up­front about its re­source ef­fi­ciency and waste gen­er­a­tion.

In Ger­many, it has faced protests over plans to build its new “gi­gafac­tory” in a for­est near Ber­lin.

At Ark In­vest, one of Tesla’s big­gest sup­port­ers, the com­pany makes up 10pc of its fund. Its ra­tio­nale is prag­matic and based on its be­lief in bat­tery tech­nol­ogy and con­vic­tion that build­ing elec­tric cars is more cap­i­tal ef­fi­cient than build­ing gaso­linepow­ered ve­hi­cles.

Tesla is also ben­e­fit­ing from a wider revo­lu­tion in in­vest­ment trends.

Pas­sively-man­aged funds, which pick a bas­ket of stocks based on a cer­tain cri­te­ria and then hold them for in­vestors, have ex­ploded in pop­u­lar­ity as high fees and in­con­sis­tent re­sults mean funds man­aged by a pro­fes­sional stock-picker have lost their shine.

Emma Wall, head of in­vest­ment anal­y­sis at Har­g­reaves Lans­down, says: “We have seen an in­crease in pas­sive in­vest­ing over the past six months, par­tic­u­larly as the mar­ket fell, and it be­ing a large stock means that it will oc­cupy a large po­si­tion in a num­ber of in­dices.

“If you are buy­ing a pas­sive fund which tracks a num­ber of dif­fer­ent things – a broad US pas­sive fund, a tech pas­sive fund, an ESG pas­sive fund, and var­i­ous it­er­a­tions of the three – you are likely buy­ing Tesla. Flows into pas­sive funds will push up Tesla’s price.”

It doesn’t take a scep­tic to blanch at the heights the Tesla val­u­a­tion has reached in re­cent weeks. The speed and scale of the climb has raised fears of a bub­ble, es­pe­cially as younger, in­ex­pe­ri­enced in­vestors bought the shares at their high­est heights.

“It would be very easy to say ‘don’t in­vest in the stuff that’s done well,’ but it’s a trade that has played out well for a num­ber of in­vestors.

“If you’d just bought the broader US mar­ket five years ago, a lot of peo­ple would have said that those val­u­a­tions look stretched, and yet it has con­tin­ued to rally even con­sid­er­ing the volatil­ity of the last six months,” says Wall.

Wall says this is part of a broader trend of al­ready-huge tech­nol­ogy stocks like Face­book, Google and Ap­ple gain­ing even more as peo­ple pile into pas­sive in­vest­ing. But these three com­pa­nies are true tech­nol­ogy firms, and do not face the same head­winds that Tesla does in the no­to­ri­ously nar­row-mar­gin car man­u­fac­tur­ing in­dus­try.

Even Ap­ple, which made its bil­lions in con­sumer hard­ware, is try­ing to pivot to soft­ware to pre­serve its profit mar­gins.

“Elon Musk started an elec­tric car com­pany at the per­fect time to start an elec­tric car com­pany, and I think a lot of the mar­ket par­tic­i­pants who were bank­ing on a Tesla bank­ruptcy failed to un­der­stand that,” en­ergy an­a­lyst Gre­gor Macdonald told mo­bil­ity pod­cast CoMo­tion this week. But, he said, the $250bn val­u­a­tion is too high.

“If Tesla were a soft­ware com­pany I might feel a lit­tle warmer to­ward that mar­ket cap.”

‘It’s a sup­ply and de­mand is­sue. Tesla con­tin­ues to be the main game in town when in­vest­ing in a green way’ ‘If Tesla were a soft­ware com­pany I might feel a lit­tle warmer to­ward that mar­ket cap’

Elon Musk, the chief ex­ec­u­tive of Tesla, has put the elec­tric car­maker firmly in the driv­ing seat with the com­pany mak­ing prof­its in the last three quar­ters

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