What Wall Street Is (Still) Missing About Tesla

We believe the market’s focus on short-term results creates opportunities for long-term investors in ground-breaking companies like Tesla.

In 2020, we explained why we think it’s wrong to view Tesla as an automotive manufacturer only. (See "The Ongoing Rise of Tesla," September 2020.) We view Tesla as an innovative, early-stage growth company not only fundamentally changing its own market but potentially affecting adjacent markets as well. 

Tesla Is Disrupting and Transforming Multiple Industries

Consider the radical changes to transportation if Tesla succeeds in producing autonomous vehicles. Without the risk of human error, commercial and personal transportation should become safer (no human drivers), reshape the automotive insurance industry (e.g., shift liabilities) and enable robotaxi services.

Because every Tesla vehicle’s functionality relies on internet connectivity to the Tesla Cloud, the company has been able to record billions of miles’ worth of data, including mileage logged by the company’s self-driving Autopilot feature. As a result, we believe Tesla has a huge advantage over competitors in the autonomous vehicle industry. 

Take the Long Way Home

Given the company’s potential to transform various industries over time, we think it’s short-sighted and undesirable to react to every headline. We believe short-term market movements are just that—short-term overreactions that fail to take a holistic view of the company and its tremendous business opportunities. 

Figure 1 | Reimagining Markets Can Be Volatile But Potentially Rewarding

Tesla Stock Price History

Data from 6/29/2010 – 5/31/2021. 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 judgement and, along with other portfolio data, are subject to change without notice. Past performance is no guarantee of future results.

Figure 1 captures Tesla’s short-term volatility, while the increase in its share price over time recognizes the company’s potentially transformative capabilities. Recent events sparking price volatility include news that Chinese deliveries decreased from one month to the next and a market commentator arguing the stock lacked “a near-term catalyst.” These are the very definitions of short-termism. We like Tesla because we believe the company is reimagining entire industries, not because of its month-to-month delivery numbers.

Ford’s New F-150 Lightning Should Help Electric Vehicles Become More Mainstream

Tesla also came under pressure after Ford announced the addition of an all-electric model to its popular line of F-150 pickups for 2022. While some observers argue competition in the electric vehicle (EV) space is bad for Tesla, we view Ford’s announcement as immensely supportive of the transition to electric vehicles and Tesla’s own business over time.

There has been enormous skepticism about Tesla’s new Cybertruck and demand for an electric pickup truck. But Ford’s announcement makes clear that even in the pickup truck space, electric is the wave of the future. To us, it’s another sign of the normalization of electric vehicles.  And remember, electric vehicles currently account for less than 5% of vehicles sold globally, so there is tremendous room for growth in this space.

Tesla Is a Vertically Integrated Company with Agility in Its DNA

Tesla has navigated the global semiconductor shortage remarkably well relative to other automakers thanks to the company’s vertically integrated supply chain. That is, while other car makers are dependent upon external providers for certain parts, Tesla owns and controls more of the parts and processes used to build its vehicles. The global semiconductor shortage is a great example of this process at work. The company adapted a different type of microcontroller to its existing systems and hardware with only minimal disruption to production facilities.

Traditional manufacturers, such as Ford and General Motors, however, expect to take earnings hits of about $2 billion each this year because of the chip shortage.1  Nevertheless, we don’t want to give the impression that Tesla is immune to supply-chain issues if the current shortages persist or worsen, but the company has so far proved to be much better positioned than its peers.

Meanwhile, Tesla’s most recent quarterly earnings report showed its production and delivery numbers beat expectations, with higher revenues. What’s more, margins improved as the company continued to refine its manufacturing processes.2 These results and its demonstrated ability to pivot amid production challenges comport with our view that Tesla is nimbler and more innovative than traditional auto manufacturers. We believe the company is poised to deliver long-term growth and outperformance.

Tesla Continues to Offer Unrivaled Competitive Advantages

Ultimately, we view Tesla as an innovative, early-stage technology company whose products offer advantages over competitors that should help with attractive growth well into the future.

While other investors may focus on short-term results, we think wealth creation comes from identifying above-average growth companies early in their life cycles and compounding that growth over time. Simply put, we believe we win by playing the long game.

What Wall Street Is (Still) Missing About Tesla

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

1Michael Wayland, “Chip shortage expected to cost auto industry $110 billion in revenue in 2021,” CNBC, May 14, 2021.

2Tesla Q1 2021 Update, April 26, 2021.

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