The Daily Telegraph - Saturday - Money
Profit from Tesla’s electric rivals
Shares in companies with supercharged ambitions are cheap, writes Sam Benstead BE LEADER OF THE BATTERY PACK
TVolkswagen VW aims to make 80pc of its cars electric by 2030, which could make it the world’s leader esla hogs the limelight when it comes to electric vehicles but traditional car companies are fast catching up and their shares are far cheaper – which could make them better investments.
Electric vehicles ( EVs) account for only around 4pc of cars on British and American roads, according to the consultancy McKinsey, but that is about to change.
The sale of new petrol and diesel cars and vans will be banned in Britain from 2030 and drivers who want electric alternatives will not be short
General Motors GM wants to sell a million EVs a year by 2025 and will invest £20bn to hit that goal of options. By the end of next year 450 new models will have been launched globally in just 24 months, according to McKinsey. The opportunity for any manufacturer that dominates the market is enormous.
Tesla is the current leader: it accounts for around 16pc of sales globally. This is reflected in its share price, which has risen 14-fold over the past two years. But traditional car companies are spending heavily to compete and investors are beginning to pay attention.
Eoin Murray of Federated Hermes, an investment manager, pointed to EV investment of a combined $200bn (£145bn) from Daimler, General Motors, Renault-Nissan, BMW, Ford and Volkswagen, which has set itself the goal of becoming the world’s largest electric car producer.
Today, BMW, Nissan and VW, as well as Chinese groups BYD and BDEV, come closest to Tesla, according to McKinsey. In 2019 European rivals produced a combined output of around three-quarters of Tesla’s, but this could be about to change: Deloitte, the consultancy, has forecast that VW will be the biggest EV producer by 2030.
As these car companies play catchup, their shares are beginning to rise. VW’s stock has risen by 65pc this year, GM has rallied by 45pc and BMW has gained 19pc. Tesla’s shares have risen by just 8pc over the same period as their rally has cooled.
Christian Armbruester of Blu Family Office, a wealth manager, said VW was best placed to displace Tesla and its shares were extremely cheap by comparison.
“The stock has underperformed Tesla by some 1,000 percentage points in the past two years. However, at long last the share price is on the rise. It already produces nearly as many electric cars as Tesla and it is now getting into batteries. By all measures the people’s car company is still massively undervalued versus Tesla,” he said.
Barry Norris of investment manager Argonaut Capital agreed. He said Tesla was priced to the point that investors expected it to dominate EV sales in the future, but VW was better placed to hit that goal.
“At the beginning of 2021 Tesla had a stock market value of 10 times that of the world’s current leading producer, VW, which during 2020 sold 20 times more cars, had seven times more revenue and was five times more profitable,” said Mr Norris.
He added that the German company had announced at its recent “Power Day” that by 2023 it would be able to halve the cost of its batteries to below that of Tesla and shift 80pc of its output to EVs by 2030.
“This would not only make VW the leading global manufacturer of EVs but would also mean that its EV profits would be comparable to, and in the long term exceed, those of its traditional internal combustion engine vehicles,” he said.
Traditional car companies are catching up with Tesla’s battery technology. Mr Murray said Toyota in Japan was a leading player in solid-state batteries, which promise to be a lighter and safer option, while VW has invested $300m (£ 217m) in American battery group QuantumScape, whose shares have quadrupled in the past 12 months.
Mr Murray added that Hyundai was a leader in developing lithium-sulphur batteries as well as, alongside Honda and Toyota, lithium-oxide alternatives.
But Tesla’s backers still believe the shares can keep rising despite their five-fold jump in the past year. Gary Robinson of Baillie Gifford, the fund group that was one of the earliest investors in Elon Musk’s company, said Tesla’s ambition was to sell tens of millions of cars a year and become the biggest car company the world has ever seen.
“There’s no guarantee it will get there but I think it has a good chance and I would not bet against it,” he said.
He said investors also failed to appreciate just how profitable Tesla could be if it reached this scale because it could also sell software for its cars, which would offer higher profit margins.
“If you look backwards at the car industry it is low margin and cyclical with low customer loyalty. But looking forward it could be more like the smartphone market, where software is more important and brand loyalty is stronger,” he said. He compared Tesla to Apple, which reinvented the phone market when it launched the iPhone.
‘VW sold 20 times more cars than Tesla in 2020 and was far more profitable’