X

The Tesla valuation debate – are you in or out?

Let’s start with some high-level numbers. Since the start of 2020, Tesla’s share price is up 877% (to the time of writing on 10 February), its market capitalisation stands at over $780bn (up from $75bn over the same period), making it the 5th largest company in the US equity market, and it stands tall on a forward price/earnings (P/E) ratio of 206x. This compares to other renowned auto manufacturers, such as Toyota and Volkswagen, at markets caps of $253bn and $105bn and P/Es of 14x and 13x, respectively.

In fact, Tesla’s market cap is now greater than the next nine largest auto companies combined. Of course, to the many willing buyers of Tesla at such high multiples, they see it not just as a typical auto company but something much more, namely a technological and renewable energy disruptor that is driving innovation and thus will be capable of delivering extraordinary growth rates long into the future, not just from electric vehicles but automated vehicles and its renewable energy business. Only then can a reasonable argument be made to support the current valuation of Tesla.

Whilst hitting or exceeding these lofty growth expectations might prove difficult alone, it becomes even more so when you consider the inevitable challenge from competitors who will eventually catch up with Tesla. For instance, US peers Ford and General Motors have recently committed to invest $22bn and $27bn in electric vehicles by the end of 2025. In Europe, Volkswagen has announced intentions to invest $86bn in electric vehicles and other technologies through 2025. Investment from peers will likely erode Tesla’s 18% electric vehicle market share over the coming years, though admittedly they might become a smaller piece of a much bigger pie.

Tesla is also interesting from an ESG perspective. On the one hand, it produces highly energy efficient (as opposed to fuel guzzling) vehicles. On the other hand, critics have questioned the supply chain and labour management, and the governance of the company, not least the behaviour of CEO Elon Musk that divides opinion but, more so in the past, the board’s close ties to Musk’s other ventures including SpaceX.

An interesting recent development is the company’s decision to invest $1.5bn of balance sheet cash in bitcoin, which if nothing else is a fascinating capital allocation decision given the stark difference in volatility profiles of the two assets. This raises the notion of legitimising the use of cryptocurrencies in the institutional space, but that’s one for another time!

There is no doubt Tesla divides opinion, some love the growth story, others can’t look beyond the valuation. We would fall more into the latter camp today. We have some exposure through our underlying growth and momentum managers, whilst other managers, specifically those providing value and quality exposure, do not allocate. That leaves our Global Equity fund with a 0.8% position (as at end of January) which is below the MSCI World’s 1.2% allocation.

 

Featured News

This Week’s Most Read

  • Price of scarcity: Central banks are driving large valuation premiums on assets with limited supply

    By Charles-Henry Monchau, CIO at Syz Bank It is important to understand the concept of scarcity to better understand its mechanics and its impact on markets. Scarcity refers to the

  • Why now is the right time to invest in Japan

    By Masakazu Takeda, lead portfolio manager of the Japan Focus All Cap strategy at SPARX Asset Management The issues that have plagued Japan over the years are now at the doorstep of

  • Why high yield bonds could be the next ESG frontier

    By Lila Fekih & Mark Remington, Co-Portfolio Managers of the New Capital Sustainable World High-Yield Bond Fund at EFG Asset Management  Equities have garnered the most attention in the ESG

  • Fundsmith hints at bumpy ride

    Terry Smith’s annual letter to shareholders reports a slight underperformance of the MSCI World Index over one year Despite the value rally, quality stocks outperformed in 2021 Smith says unexpectedly

  • Brooks Macdonald Funds under Management hit £17.3bn

    Brooks Macdonald today publishes an update on its Funds under Management (“FUM”) for its second quarter ended 31 December 2021, together with a Trading Update for the half year. FUM

  • Ninety One appoints Juliana Hansveden

    Hansveden to develop emerging markets sustainable equity capability Ninety One has today announced the appointment of Juliana Hansveden, CFA, as Portfolio Manager, Emerging Markets Sustainable Equity. In this newly created

  • Man GLG’s Atherton: Governance revolution in Japan like the UK in the 80s and 90s

    The ESG-driven corporate governance revolution in Japan is creating investment opportunities similar to those in the UK in the 1980s and 1990s, says Jeff Atherton, manager of the Man GLG

  • BlackRock launches two new active Climate Action funds

    The BGF Climate Action Multi-Asset Fund and the BGF Climate Action Equity Fund leverage BlackRock’s deep expertise in active sustainable investing with the objective of generating positive environmental impact.  As

  • US December CPI inflation rises 7% from a year ago

    David Goebel, Investment Strategist at Tilney Smith & Williamson, the wealth management and professional services group, comments on the latest US CPI inflation data: US December headline CPI inflation rose

Wealth DFM