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The investment case is about a lot more than just electric vehicles
Thursday 08 Jul 2021 Author: Steven Frazer

Tesla’s 6% stock slide so far in 2021 draws a sharp contrast with the firm’s incredible 2020.

Yes, the pandemic early last year took its toll, nearly halving the share price from $160 to about $85 during the teeth of the sell-off, yet what came next almost beggars-belief. From those lowly levels the stock went on a tear that saw it surge more 700% for the year.

Putting aside the more excessive bluster and hype, investors might well wonder whether the stock is worth the risk. After all, the short-term valuation is still eye-popping.

The company is trading on more than 13 times the near-$49 billion revenue expected for 2021 (to 31 December) and a price to earnings multiple of 151. Nonetheless, there are good reasons to own the stock.


Tesla has established itself as a major player in the electric vehicle market and created a highly desirable brand.

Yet Tesla is more than about a set of wheels taking you from A to B. It is also a renewable energy player, selling solar panels and special batteries that store energy, detect outages and act as a power source when the grid goes down.

Elon Musk won’t stop there. His diverse ideas for the future include millions of self-driving   robo-taxis, a network of underground roads to avoid traffic, an online platform to sell Tesla cars, design and engineering centres in China… the list keeps growing.

Some of the more immediate opportunities include its Powerwall energy storage solutions and SolarCity. The latter creates and sells solar panels and roof tiles, but Musk sees the Tesla-owned business playing a big role in helping eliminate our dependence on fossil fuels and instead drawing energy from the ‘giant fusion reactor in the sky’, or in other words, the sun.

The battery and energy storage opportunities may end up being Tesla’s biggest markets, with revenues that eclipse those of its cars. This is opportunity is often overlooked by retail investors.


Tesla’s rapid growth trajectory demands a pricey valuation. It is not difficult to find studious analysis that predicts scope for Tesla to become the 6th US-listed company to break the $1 trillion market value level in the coming years, after Apple, Amazon, Microsoft, Alphabet and Facebook. The company is currently worth more than $650 billion.

UK investors are becoming increasingly used to hearing seemingly outlandish stock price predictions from ARK Invest, Kathy Wood’s US-based investment firm that has become one of Tesla biggest bulls. But ARK is not alone.

US broker Trefis believes Tesla’s stock currently at $678 could approach $1,600 by 2025 and over $7,500 by 2035, based on its analysis of the company and its opportunities.

Tesla will need to scale annual vehicle deliveries from about 500,000 in 2020 to around 3.2 million in 2025, with a trajectory to 30 million by 2035, its research states.


Electric car adoption across the globe is expected to gather pace as price, range anxiety and other frequent objections put forward by consumers are worked out. This should mean hitting a popularity tipping point when most new vehicle buyers will want electric, and that’s presumably when Tesla will be able to really leverage its technological and time advantage.

‘Expecting electric vehicles to become mass market makes sense,’ say analysts at CB Insights, the venture capital research company. The UK has already voted to ban the sale of new petrol and diesel cars from 2030, while China has said that 20% of cars sold in the country should run on some alternative source of fuel by 2025.

Car makers are racing to take advantage of this major shift in the world’s transportation. ‘General Motors plans to have 20 electric vehicle models on the road by 2023, and Volvo is expecting to sell one million electric cars by 2025,’ says CB Insights.


The electric shift is worldwide and industry-wide so Tesla will face a lot of competition. But data shows the company is making progress. For example, it believes deliveries will increase to more than 750,000 in 2021, driving revenue growth of 50% this year, and more than 30% higher in 2022.

For context, data from research firm Wards Intelligence estimated around 1.32 billion cars, trucks and buses were on the world’s roads in 2016, with projections then anticipating 2.8 billion by 2035.

‘(Tesla’s growth goals are) a big jump, and a lot needs to fall into place, but then Tesla did achieve the uphill task of increasing deliveries from 30,000 in 2015 to 500,000 in 2020,’ says Trefis. ‘Tesla said that it expects to grow deliveries at a compound average growth rate of 50% a year over a multi-year horizon.’


For Tesla’s shares to keep rising to ARK and Trefis’ bull case levels, it will need to continue improving adjusted earnings margins. Estimates draw to 20%-plus margins over the coming years from 2020’s 7.7%, made possible through increased production automation, improving economies of scale, declining battery costs and higher software content in its vehicles.

Judging the stock’s valuation on a 12-month or even two-year view is missing the point. It’s the next decade or two that matter, and this author believes that investors willing to take that longer-term view will be rewarded in time.

Tesla’s shares are not cheap at this level, yet the stock’s aimless drift through 2021 so far makes this a great time to take a manageable stake for the longer-term.

Alternatively, a more risk-managed way to gain exposure to this ambitious and world-changing business would be to consider a buy a fund or investment trust with a decent-sized stake in Tesla. For example, Scottish Mortgage (SMT) has 4.5% of its near-£19.5 billion of assets under management in the company.

DISCLAIMER: Steven Frazer owns shares in Scottish Mortgage.

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