Tesla recently hit a trillion-dollar valuation as the excitement about electric vehicles continues to grow. But could new EV upstarts challenge Tesla’s dominance? Anthony Okolie speaks with David Mau, Portfolio Manager, TD Asset Management, about the bull and bear case for Tesla.
Joining me is David Mau, Portfolio Manager at TD Asset Management. David, let's start with the bull case for Tesla.
David, you say Tesla is a good operator.
- Yeah, absolutely. Look, Tesla continues to increase their scale and efficiency, which is contributing to higher margins and profitability. The company now has production in the three most important auto markets in the world, which is the US, Europe, and China, and they're actually meeting the goals that they've set out. Last year, they delivered about 500,000 cars. This year, they're going to deliver close to 900,000 cars. And next year, 2022, they're on track to deliver close to 1.3 million cars. So that really demonstrates their production capabilities, their supply chain management, especially in an environment where right now, we've seen a lot of the other automakers struggle with their supply chain and their ability to produce. So there's no question that Tesla is a very competent automaker and can compete with pretty much every traditional OEM there is out there.
- OK. Next, the US infrastructure plan on EV charges.
- Yeah, good point. So as part of President Biden's infrastructure spending plan, we know that there's going to be about $7.5 billion that's earmarked for building out electric vehicle infrastructure and charging. So this $7.5 billion is going to be spent over the next, call it, about five years. And what that's going to do is it's going to add hundreds of thousands of new EV charging stations across the US. So for a market share leader like Tesla, anything that the government is going to do that's going to help accelerate the adoption of EVs and make people more comfortable with buying EVs and basically increase the potential pool of electric vehicle buyers is going to be good for a company like Tesla.
- OK. Finally, talk to us about profitability.
- Yeah, so Tesla has a couple of things going for it that most other automakers don't. The first one is it's beginning to generate a lot more revenues from its subscription services. So these subscription services are things like giving the purchaser full self-driving capabilities, there are other connectivity capabilities and performance features that don't come with the basic car, so people are paying every month on these subscriptions. So that's a revenue stream that most other automakers don't have.
The other thing is what we've seen over the last couple of years is that Tesla's warranty costs are actually lower than other automakers. So what that means is every year, auto manufacturers set aside a portion of revenues to cover warranty costs for people who've bought the car and there's some problem that comes up later that's covered under the warranty. And so that pool of money that Tesla needs to set aside is actually a lot lower than most other traditional OEMs. So these are drivers that basically fall straight to the bottom line and help Tesla's profitability.
- OK, so some strong factors to Tesla being bullish. Now we'll take a look at the bear case.
First, Tesla faces a lot of competition.
- Yeah that's a really good point, Anthony. I mean, there's a ton of competition. There's going to be hundreds of new electric vehicle models coming in the next couple of years. Guys like GM, Ford, Volkswagen, BMW all have new models coming out. So consumers are going to have a lot more to choose from. So they don't have to buy a Tesla if they want an EV.
So on the consumer side, like I said, there's a lot more choice. And also for investors in the market who are looking for EV companies to invest in, there's a lot more choice as well. I think about a week or two ago, there was a company called Rivian who makes electric vehicles, mainly pickup trucks and SUVs and commercial vehicles, and that IPO did very, very well. So there's competition coming from the number of models that are going to be available for consumers to choose from and also from the number of companies that investors can choose from as well.
- OK. Next you say the CEO, Elon Musk, is unpredictable.
- Yeah, look, I would kind of call that a key man risk. Elon Musk is certainly very charismatic. He's been a great leader for the company. And he's proved a lot of people wrong over the last few years. On the flip side, though, he can be erratic and unpredictable. His tweets tend to move the stock price a lot more than basically any other company out there. And he does engage with politicians and basically netizens over on Twitter quite often. And he's done some things in the past where he said he was going to take the company private, and that didn't happen. He was smoking pot on somebody's webcast. So those are things that create a lot of volatility and uncertainty in the stock. It's not necessarily great for investors.
- OK. Importantly, talk about valuation.
- Yeah, so valuation, Tesla has a market cap today of about $1.1 billion. So that's more than every single other automaker in the world combined. So you could argue whether or not that's justifiable. Certainly, Tesla is in a great secular position, it has a lot of strong tailwinds. But for a company to be trading at, call it 125, 130 times next year's earnings versus other automakers that are trading at about a tenth of that, we don't know if that's justifiable yet. So there's a risk with the valuation, where it is now.
- What are your final thoughts on the stock?
- Yeah, look Tony, the company is a profitable company, we know it's got very strong secular tailwinds behind it. We know that this EV transition is not going to go away. So this is going to be a growth company for the next 20 to 30 years. That being said, there are certain risks associated with the company. There's going to be increased competition, the CEO introduces a certain degree of volatility that doesn't exist at other companies. But if you want a high risk and potentially high reward company, you could certainly make a case for owning this in your portfolio. I probably wouldn't make it my largest holding, but there's definitely room for a stock like Tesla.
- David, thank you very much for your time.
- You're welcome.