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What’s driving Tesla?

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Silicon Valley disruptor Tesla is hitting the headlines again as better than expected fourth quarter earnings have got analysts thinking big.

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Last week’s earnings report showed the company achieved its second consecutive profitable quarter, and came with the message that investors should expect more of the same. This news, along with increased vehicle sales and the delivery of its Chinese factory, has put a different slant on the company’s future for some tech investors.

US-based Argus Research was one firm to lift its price target for the automaker this week, with the surrounding excitement helping the stock to a near 20% surge yesterday alone. Hitting the $780 per share mark means Elon Musk’s company has now risen by 173% over the past year, becoming the world’s second-largest automaker by market cap. Its $100bn+ current valuation means the autonomous vehicle producer comfortably eclipses the likes of BMW and Volkswagen, jumping into second place behind Toyota.

All this while bringing in a fraction of industry revenues. Looking at 12-month forward sales estimates, Toyota is projected to generate around $276bn; Volkswagen estimates sit at $283bn, with Tesla well behind at $31bn according to data from Refinitiv.

This raises two questions in particular - where is the value in Tesla from here, and does that justify such a huge rerating?

To answer the first question we have to do what Tesla has always asked us to do - look to the future.

While the wider auto sector is pushing into electric vehicles and autonomous capabilities, Tesla’s investors point to the company’s individual efforts in leading the pack so far, and how it can storm ahead from here.

While the likes of Ford, BMW and Audi are teaming up with radar, sensor and even video game chip developers, as well as actively sharing technology between firms to allow their cars to communicate on the roads, Tesla is going it alone. Its belief in building a fully autonomous car without LiDAR (laser-based radar) which, in part, helps identify pedestrians and other cars, puts it at odds with the wider industry and is just one example where it could bound ahead, or fall behind.

Its value is in this individual approach and whether its production numbers and technology can keep ahead of the rest of the sector.

But it has been a rocky road so far, with many not quite ready to hitch their cart to the erratic brain of founder Elon Musk, who tends to shun the focus on concrete deliverables. To some extent, looking to the long term at the expense of quarterly Wall Street updates is a good thing but when the leader is as unpredictable as Musk, it’s not surprising the market likes to check in with him more often than usual.

It’s one reason why some market-watchers are sceptical of the company’s trajectory from here, leading into the second question: valuation.

The hype around the firm at the moment is palpable but if its price is detached from its fundamentals the investment case becomes less attractive.

James Clunie, manager of the Jupiter Absolute Return Fund, part of the Fidelity Select 50, is one investor yet to be convinced. Explaining the fund’s short position in Tesla, his January message to investors notes, “our analysis continues to suggest the market value of the stock is out-of-step with underlying business fundamentals”.

There’s an important lesson here for personal investors - try to avoid falling victim to recency bias. One swallow doesn’t make a summer, so if you aren’t convinced either way about a company on the back of one quarter’s results, you’re absolutely right. Fear of missing out can mean we jump on the bandwagon without looking at the bigger picture, only to feel slightly less sure later on.

There’s a reason professional investors look for consistent earnings streams with dependable management teams overseeing solid long-term strategies. Where opportunity presents itself, bottom-up research is essential - it’s what will make you a Tesla bull or bear, and if the headlines are building your excitement instead it’s time to take a step back and regroup.

Five year performance

(%) As at 3 Feb 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Tesla -20.6 44.5 33.5 -14.9 173.0

Past performance is not a reliable indicator of future returns

Source: Nasdaq, as at 3.2.20, share price growth in dollar terms

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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