Baillie Gifford (holders of Tesla)
Having initially invested in Tesla for our Long Term Global Growth portfolio in 2013, we berated ourselves a year later.
This may sound odd given that the share price had quadrupled in value during those 12 months. Instead, we were upset because we felt our initial blue sky scenario for Tesla’s operational progress had been strikingly feeble.
The best we could manage in our initial 10 Question Stock Research note was that Tesla could one day become a BMW, with sales of two million units per annum, at 10% margins, and potentially a market capitalisation of $45bn some 15 years later. Thanks to our increasing understanding of the company in the years that followed, including its market opportunity and its ability to execute, we recalibrated our probability-adjusted upside scenarios as our confidence grew.
Looking to the future opportunity from now, it’s not overly heroic to imagine that Tesla could command a 10% to 15% share of global vehicle production per annum over the coming decade.
That might seem like a far stretch from its tiny share today (its 367,500 deliveries in 2019 accounted for roughly only 0.5% of the 75 million cars sold that year globally). Yet, on the other hand, it may be terribly feeble if we consider that Tesla already commands nearly 20% of the plug-in hybrids and fully electric vehicles (EV) market worldwide, and nearly 30% of the EV market alone.
With the global EV market growing exponentially and the impending decline of the internal combustion engine against a backdrop of climate change, Tesla is remarkably well positioned to take share of the global auto market in years ahead. Moreover, with vehicles becoming increasingly computers on wheels, might it not be possible that we see a few large key players emerge as we have seen in the smartphone market?
Isn’t the traditional auto industry unusually fragmented and ripe for consolidation? To jog our memories, GM once had an over 50% US market share in the 1950s and its business model was far less differentiated than Tesla’s is now. Whichever way one looks at it, Tesla is a deeply immature business in a vast industry.
So, in thinking about upside, a 10% to 15% market share in the coming decade could imply around 10 million vehicles. Assuming an average selling price of $50 000 at 15% operating margins, this gets to $75bn in operating profits. At a 20 times multiple, this gets us to well over a $1tn market capitalisation.
This scenario ascribes no value to the autonomous driving opportunity that could see Tesla’s margin profile transform to something akin to a software business. It also entirely omits the renewable energy solutions in terms of storage and solar.
Pushing the bounds further, Tesla talks of producing 2TWh of battery capacity in the long term. The 10 million vehicles scenario described above would account for just 0.6TWh, so are we being too conservative (as we were in 2013)?
We can of course slice and dice the numbers and arrive at many very different potential outcomes. But we think there is a growing probability that Tesla could be worth far more than 5 time more from here within a decade. As ever, the biggest long-term risk at a portfolio level is that of missed opportunity.