There is a growing probability that electric car manufacturer Tesla will become the world’s most valuable company, according to Scottish Mortgage Investment Trust’s James Anderson, who says he is “astonished” at the negative way in which the company is portrayed in the press
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Anderson (pictured) has previously referred to research from professor Hank Bessembinder of Arizona State University showing that half of the wealth created by the US market from 1926 to 2016 came from just 0.4 per cent of companies.
As a result, he said that it should be the mission of fund managers to spot the potential of this “vanishingly small number of companies” and support them from an early stage – adding that over the next decade, the majority of these will be found in areas associated with renewable energy.
“By 2028, we will take for granted that the great triumphs of the age have been the transition to renewable energy and the transformation of healthcare (and much else) through biological understanding,” he said.
“Of course, exponential change matters. I often say that we don’t do predictions or forecasts because what we look at is absolute underlying developments that are now so established that they have a 90 to 95 per cent chance of happening.”
“But of course, they have only reached 1 per cent of their market in the meantime and so are not perceived to be as important as they say they are.”
Anderson said that while one of the major themes in markets at the moment is how China “is in deep trouble”, with its car market retreating, he is more interested in the 50 per cent increase in sales of electric vehicles it saw in 2018. He is confident this will be the case again this year.
He admitted, however, that the progress of renewables is unevenly distributed across different countries, which may explain why there is still scepticism about the trend towards electric vehicles.
“For instance, last year in Holland 30 per cent of all new car registrations were electric,” he said. “In California, which is assuredly not part of Trump’s America, that figure reached 9 per cent. And in almost all cases the assumption is solar energy is now the cheapest form of power production.”
Turning specifically to Tesla, Anderson’s co-manager Tom Slater said that while the company has faced significant challenges in the past few years – many short-sellers have predicted it would run out of money on various occasions – it has now overcome these issues and is ramping up production of its mass market Model 3 vehicle, allowing it to generate significant amounts of cash.
He added that the most interesting point for him is that with everything that Tesla has been through, none of the competition appears to have closed the gap.
“There have been lots of announcements elsewhere but there is no real product and no real prospect of its competitors producing anything of significant volume for at least a couple of years,” he explained.
“So, the real question is about the pace of investment and I think the news there has been quite encouraging.
“It has started building a facility in Shanghai to produce cars. China is the largest car market in the world, it has the greatest propensity for electric vehicles, and it looks like that factory is not going to require a great deal of capital, for a variety of reasons.
The manager added: “I think that as you start to see the cash come in from the scale of production of the Model 3, demands on cash aren’t going to be as significant as you might expect. And I think the other part of it is that there are lots of new markets of significant volume that it hasn’t gone into yet, whether that is semi-trucks or crossover SUVs, those are very big categories there.”
“I wouldn’t avoid [that] it has been a difficult period, but I think we have come through that.”
However, Anderson described Slater’s summary of Tesla’s current position as “opportunely coy and particularly modest”.
“It goes back to the very start, so how many years ago now? Tom had a meeting with Mr [Elon] Musk [Tesla chief executive officer], at which, very unkindly, Tom gave hints as to what the profitability modelling of Tesla was,” he said.
“Mr Musk was more than usually contemptuous and said to Tom, ‘you quoted in your write-up that there is a small but growing possibility that Tesla will be the most valuable company in the world and that with everything we do, you keep updating that probability’.”
Anderson added: “I think there is now quite a large and growing possibility that Tesla will be the most valuable company in the world.”
The manager said he “finds it fascinating” how little attention is paid to Tesla’s energy business – the company is struggling to keep up with demand for its solar panels and energy storage systems for homes and businesses.
He also said that if you delve into the structure of returns, the only company that is similarly profitable is Ferrari – another top-10 holding in Scottish Mortgage, which Anderson said has delivered a 10-fold return since he bought it.
“In Tesla’s factory, the software knowledge has proved to be a very substantial advantage,” he continued, “and if you look at all the teardowns, which embarrassingly most analysts that have been very anti-Tesla are now financing, actually it shows that from Jaguar onwards they were wrong, these companies cannot compete with what it is doing.”
“It produced some news [recently] about the accident rate once you are on its driving system and if it can capture that stream of revenue too, I think we have to move the probability-adjusted long-term value of the company upwards.”
Anderson added that while the overall industry view on autonomous driving has become more pessimistic, Tesla’s position has strengthened. His “only point of quibble” is to what extent Tesla should be pushing its profitability – on Friday it announced it would be letting go 7 per cent of its workforce at the same time that it is increasing production, to help lower costs.
“How much should we be pushing the price models to establish the volume, but without the same profitability? How much should we encourage it to capture other markets quickly?” he asked.
“Some of the Chinese expenditure isn’t going to be its own, but I sort of feel the model is now well enough set up that we should encourage it to do as much investment as it can. He [Musk] is not usually a man who needs to be encouraged.”
Despite all of the themes working in Tesla’s favour, however, Anderson said he still receives up to 20 calls a day from journalists denouncing the company.
“I happen to think it is going extremely well and I have to say that I am astonished by the way the company is perceived,” he finished.
Data from FE Analytics shows that Scottish Mortgage has made 750.57 per cent over the past decade, more than three times the gains of its IT Global sector and FTSE All World benchmark.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust has ongoing charges of 0.37 per cent. It is currently trading at a premium to net asset value of 2.63 per cent compared with 2.17 and 1.88 per cent from its one- and three-year averages. It is 8 per cent geared.