The Ongoing Rise of Tesla

The Benefits of Long-Duration Growth in a Short-Term World

By Keith Lee

We view Tesla as an early-stage manufacturer producing a product with many advantages over electric and combustion engine competitors that we believe is positioned for growth well into the future.

This view is consistent with our investment process, which aims to find companies early in their life cycles. We think investing in early-stage companies allows you to capture higher growth and sustain it longer. While others focus on short-term results and quarter-to-quarter fluctuations in earnings, we think wealth creation comes from playing the long game–identifying above-average growers early in their life cycles and compounding that growth over time.

Unmatched Competitive Advantages

We believe these key points capture Tesla’s competitive advantages:

  • The company manufactures electric vehicles of high-quality design relative to many. Many traditional auto makers, who merely retrofit existing designs and manufacturing processes for electric vehicles.
  • It possesses a business model built on direct to consumer. Tesla’s distribution model has historically higher profitability, building each vehicle to order and offering its products through company-owned showrooms. Traditional auto manufacturers, in contrast, must build inventory and have higher overhead.
  • The company selectively enters attractive segments of the vehicle market, e.g., SUV, pickup truck.
  • Its battery and chip technologies provide advantages over those of other electric vehicle manufacturers.
  • The company enjoys an edge over competitors in terms of its massive amount of self-driving data and number of autonomous miles driven.
  • Tesla’s continuous innovation, safety record, performance and vehicle life give it advantages over combustion engine vehicle makers.
  • Potential market share gains (Tesla is estimated to deliver around 500,000 vehicles in an 80-million-vehicles-per-year global market), new products (semi-tractor and pickup trucks), and energy business opportunities may help position the company for sustained growth. 


Figure 1 | Tesla’s Gains Reflect Fundamental Strength in the Form of New Product Launches and Four Consecutive Quarters of Profitable Growth    

Data from 7/1/2010 – 6/30/2020. Source: FactSet. References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice. Past performance is no guarantee of future results.
 

What We Think Wall Street Is Missing

Many people see Tesla as an automotive manufacturer only. But we think it’s more appropriate to view it as a technology company. Consider the other parts of the business—home energy, solar, power grid, Gigafactory, and arguable transformation of manufacturing processes through automation and robotics.

If Tesla succeeds in producing self-driving vehicles, it will have transformed personal and commercial driving and enabled a robotaxi service. While we don’t value the company on these potential future businesses, we focus on the innovation and potential massive transformation of travel the company may bring about.

A group of short investors and sceptics seize on every short-term headline to justify their negative views of Tesla. We think that makes the stock a good example of why it is important to focus instead on long-term growth and innovation.

Consider Tesla’s sharp sell-off in early September when the stock price declined by a third in a matter of weeks. After finishing August at a record high, the stock was vulnerable to profit-taking. One precipitating event for the sell-off was news that General Motors took a stake in electric vehicle startup Nikola. And while it’s true that GM will help Nikola’s vehicle production capacity, we don’t see that either of these firms has significant battery production capability. And we believe this capability is a key differentiator and enduring advantage for Tesla over time.

But the Naysayers …

The company's ardent critics point to data that show Tesla owners have historically reported more reliability issues than owners of other vehicle brands, primarily relating to paint and body work rather than mechanical issues. Tesla has addressed these issues and refined its production process over the course of each model run to improve vehicle reliability. We should also point out that Tesla’s vehicles enjoy a much longer life and performance advantages compared with vehicles powered by traditional combustion engines.

Some have also criticized the safety of Tesla’s Autopilot self-driving system. We think the company is a victim of its own success—crashes are so rare that each one garners headlines. Tesla’s latest data show one crash per 4.5 million Tesla Autopilot miles driven versus one crash per 450,000 miles in conventional vehicles.

People have also complained that the cars are too expensive. It’s true that early models had luxury vehicle prices, but as the company ramped up production and improved manufacturing processes, it brought down costs and shared those savings with consumers. Tesla is now producing a sedan and SUV at prices comparable with mid-level peers.

Other criticisms of Tesla relate to its profitability and liquidity position. But the company has more than $8.5 billion in cash on hand and has been cash-flow positive four consecutive quarters. And while it’s true that margins are low now, we believe that’s, in part, an intentional decision to both invest in the business and maintain attractive pricing to gain market share. 

Playing the Long Game

We believe Tesla exemplifies the type of an early-stage growth company. Tesla is not only reimagining its own market but also has the potential to profoundly affect adjacent markets, such as commercial trucks, energy storage and solar, and manufacturing with its Gigafactory approach. We think this gives the company the potential for sustained, above-average growth.

We recognize the counterarguments and expect the stock to continue to be volatile. But we think these shorter-term concerns help demonstrate why it’s preferable to focus on playing the long game and taking a more holistic view of the company’s potential over time. 


The Ongoing Rise of Tesla

The Benefits of Long-Duration Growth in a Short-Term World

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

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