If you know me at all you will know I am very prone to a flutter on the horses, occasionally making some money! Since the Coronavirus outbreak there has been no UK horse racing of any description. Sad times. However, to quench my thirst for risk and profits my attention has turned to something that I would argue is all the more unpredictable and risky: the stock market.
Due to coronavirus, all of the main markets tumbled drastically in mid-March but have since made strong recoveries. Personally I feel the stock market is currently very overvalued with the real effects of Coronavirus (e.g. record levels of unemployment) not yet felt due to Government furlough and bailout packages. Technology companies have been at the epicentre of the markets fightback with Coronavirus heavily accelerating the use of technology in our everyday lives. Whether that be Netflix, Video Games or Zoom. Many foresee that the working landscape may completely change with the classic office work environment becoming a thing of the past, particularly as firms try to reduce their costs.
Cars and Energy
I am going to focus on the car industry and energy sectors and discuss how we could be set to see massive changes in these sectors with one technology company in particular uniquely placed to capitalise on this global predicament. My belief that is we are looking at a ‘stock of a generation’, a future Amazon or Apple currently available before it has grown to global superpower. The stock I am discussing is Tesla.
Tesla is best known for its production of electric vehicles, but it also a big player in solar power and batteries. If you google Tesla, you may read that it is significantly over-valued as a car manufacturer, however this isn’t a true reflection of Tesla. Tesla is a technology/ energy company and must be valued as such.
However, I will start by discussing Tesla’s position in the electronic vehicle market. The most obvious feature of Tesla cars is that its electric, meaning it produces no fossil fuels and is eco friendly. Tesla initially struggled to capitalise on this key selling point since its cost of manufacturing was so high (particularly battery costs), coupled with high research and development expenses. This meant it was unable to turn a profit and could only get close to breakeven by charging high prices, making their product inaccessible to the majority of consumers. Additionally, there was long charge times for relatively short journeys. Naturally, this didn’t instil confidence in potential users who had concern they could would be unable get from A to B without needing a re-charge for up to 12 hours. This resulted in many people betting against Tesla and shorting Tesla stock. Nowadays however, Tesla has successfully turned a profit for the past 3 quarters and has industry leading profit margins. I will illustrate how this has come about below.
To form the basis of my arguments I will focus on Tesla’s standard Model 3. The range is 350 Miles per charge, charging from zero to full in 40 minutes and charges at 127 kilowatts per hour (kWh), which works out at £13 per charge. This Model 3 now sells brand new for £40,000. The car has a lifespan of 300k-500k hours (roughly 25-35 years). Furthermore, despite being an electric car, the Model 3’s acceleration is very fast, clocking 0-60 mph in 3.2 seconds. This makes it roughly the same speed as a Ferrari 458.
To demonstrate the ability for acceleration of electric cars, the Tesla Roadster (sports car) does 0-60mph in 1.9 seconds which makes it the quickest car in the world. The inside of Tesla has all the electronic specifications one would expect; a simple smart screen dash board alongside its stylish and comfortable interior. Tesla also has an impressive autopilot technology which allows it to steer, accelerate and brake in its lane. This is all the more impressive when you consider Tesla’s strongest marketable credential is that it is eco friendly. Unlike previous models, a 350 mile drive and 40 minute charge-time make these cars a very workable option for people in their everyday lives. A Tesla car will cost you less to fill up than its petrol counterpart and will last you much longer, roughly 30 years. Due to constantly improving technology, Tesla has forecast that these numbers will continue to improve rapidly.
The Elon Musk effect
Elon Musk, Tesla’s CEO, has announced that in June Tesla will launch it’s ‘battery day’ which he has been quoted as saying “will blow your mind. It blows my mind”. Musk is no doubt the genius driving force behind Tesla, much like Steve Jobs for Apple or Jeff Bezos for Amazon (although I will concede I wouldn’t ask him for advice naming a child, as his new-born son has been named X Æ A-12 Musk!)
Musk, who rose to prominence through the pioneering of Paypal, is a man who is not easily impressed. One of his other companies Space X, produces reusable rockets. These rockets can launch into space and then land back on earth at an exact spot. Worth a watch on Youtube if you haven’t seen before. Pretty impressive! Hence when he announces a “battery day which will blow his mind” one is expecting something pretty good.
Conservative estimates say the new battery could produce a total mileage capacity of around 650 miles by the of the year, with a charge time of 25 minutes. This is coupled with a doubling of the total battery life to one million hours. This means the possibility of a Tesla lasting you a driving lifetime of 60-70 years. The cost of recharging will also come down meaning you could charge it for as little as £10 per charge. Tesla has been setup so its software, hardware and production are all done in house, with no outsourcing. This means it is at no risk from outside supply shocks as well as being able to keep all of their technology developments internal.
Furthermore, as Tesla’s technology advances many of its supply costs are falling. The battery powering the car is by far the most expensive component, yet Tesla’s battery costs have been dropping by 15% a year, so in 4 years these costs will have halved with no sign of these developments stopping. Due to Tesla’s eco friendly credentials they often have access to certain governments grants, as has been demonstrated in China and also in Texas or Nevada where there is potential for new Tesla gigafactories. As Tesla continue to grow, these cost savings are being passed onto consumers thus resulting in their cars rapidly becoming cheaper for the consumer. In conclusion, comparing Tesla’s electric car business model compared to that of a petrol counterpart is pretty clear cut. To put it simply: It’s cheaper to run, faster, lasts longer and is better for the environment.
If it wasn’t clear enough already, the Covid-19 pandemic has only compounded the shift away from ‘Big auto’ (Big car manufactures e.g. Ford, General Motors etc). Big manufacturers have been hit hard by coronavirus as no one is buying/selling cars at the minute and the majority of factories have ground to a halt, forcing more vulnerable organisations to take out huge loans to stay afloat. For examples, General Motors was forced into taking a $16Bn dollar loan from the Federal Bank.
Similar sort of financing activates have been seen across big auto. Often the first cuts made by ‘big auto’ are the heavily expensive research and development based electric vehicle programs which produced little to no profit. Electronic vehicle programs for ‘big auto’ are at the stage where Tesla was a few years ago. Very high running costs with little or no profit hence their reasoning behind these cuts.
Tesla, on the other hand, has a war chest of about 7 billion pounds in cash so Musk has decided to vamp up production and expansion during this coronavirus period. Expansion plans are proceeding at full speed with new gigafactories being completed in China and another one currently being built in Berlin, with discussions for a new factory in the USA underway. Similarly, in Q1 Tesla actually delivered record car sales in part due to their sales mechanism being largely online thus resulting in a smaller reduction in their car sales due to coronavirus compared to ‘big auto’. Tesla currently stands several years ahead of all its competitors in the in electronic vehicle sector whilst none of the traditional auto makers have the technology or financing to compete with them.
Musk has also stated big plans for the development of Tesla’s full self driving cars with the aim of competing with the likes of uber in the not too distant future. The only conceivable threat would most likely come from other technology companies, Google for instance, but even for tech giants it is not an easy industry to break into. James Dyson, who recently topped the Times UK rich list with wealth of £16.2bn, claimed to have made a car to rival Tesla’s. Yet even with his considerable resources and intelligence decided not to take the product forward to market as he couldn’t commercialise the product because it was too expensive to manufacture. The failed project cost him £500m.
The electronic vehicle industry is only the start for Tesla, mainly as their battery technology has countless further uses. 10-20 years ago, production via renewable energy such as wind and solar was not seen as a viable solution to provide enough electricity for the world. Nowadays, due to development in battery technology the energy conservation process is much more efficient making these renewable energy resources a realistic eco-solution for the provision of electricity to the masses. As a result, renewable energy resources are ready to break out in coming years.
Tesla acquired Solar City in 2016 and has since poured lots of revenues from Tesla into this company. Armed with the new battery technology from ‘battery day’ which I mentioned above, Tesla and it’s subsidiary ‘Solar City’ is ready to crack the market. In retail, they have solar panels and power walls which anyone can purchase and install. However, Tesla’s main arena for massive expansion is commercial. Nowadays, new commercial power plants are choosing renewable energy sources instead of fossil fuels since they’ve become significantly cheaper to setup and run, and they are more eco-friendly.
Tesla’s battery storage software is not solely limited to solar. Bear in mind that Elon Musk is also the CEO of extremely promising companies such as Space X and the Boring Company which have large potential upside for Tesla. These companies specialise in space travel and cutting edge tunnelling technology. Part of Musk’s genius is we are already beginning to see these businesses start to benefit from one another. Just 2 weeks ago, the building of a new tunnel was completed in Las Vegas by Musk’s ‘The Boring Company’. The aim of this tunnel was to greatly reduce pollution and congestion in the city, and in particular, cut travel time to the airports. I believe in the future we will see many cities move to this type of tunnelling infrastructure in order to reduce congestion and pollution in big cities. Crucially these new forms of express transport will only work with electric cars. This means in cities were these projects come into effect Tesla is going to be the vehicle of choice. Whilst the project is not yet complete in Vegas, they have already proposed projects in the pipeline in Chicago, LA and Washington.
To conclude, I believe Tesla is well on it’s way to being the next Apple/ Amazon of this generation. The shift to electric cars was inevitable but the current coronavirus pandemic has accelerated the process further increasing Tesla’s unassailable lead over it competitors. Tesla’s battery storage technology will be also be at the centre of the further shift to renewable energy in years to come with their improvements in technology making it more efficient, more cost effective and environmentally friendly compared to their fossil fuel counterparts. After years of betting against Tesla, the financial markets and money from big institutions is finally starting to flow into Tesla stock, as illustrated by Tesla’s strong stock bounce back from the lows of March (the penny is dropping). With Tesla’s ‘battery day’ only weeks away its stock price could easily move above $1000 from $815 (at the time of writing) in the very near future. I foresee this trend continuing in the coming years with the share price moving into the multi thousands in the next decade.
Disclaimer: This should not interpreted as financial advice, and should only be interpreted as educational
By Will Benjamin