Ethical Investing | Tesla Thesis
Tesla, one of the largest positions in the Global Fund suffered large stock price declines during the quarter on fears of weakening consumer demand particularly in China, increased electric vehicle competition, CEO Elon Musk’s acquisition of Twitter and continued headwinds for growth companies due to interest rate increases and inflation. Towards the end of the quarter the company announced price cuts in China, and in the new year announced material price cuts globally, prompting Tesla skeptics to conclude that the company’s leading electric vehicle position was at risk. They argue that the price cuts were needed to stimulate demand which had been lacklustre by Tesla standards (the company still grew revenue 40% during the year but fell short of company expectations).
We believe the price cuts are positive for long-term shareholders. As a company that has committed to passing on cost savings to customers, other factors such as declining input costs, economies of scale and eligibility of tax credits in the US are also reasons for the price cuts. Regardless of the macro-economic conditions and short-term factors, the long-term prospects of the company are more exciting now than ever. Tesla has industry leading profit margins, compared to others in the industry who other than BYD are all loss making.
Furthermore, traditional auto makers operate at a lower margin and return, with much of their profitability coming from financing. If we are entering a recession, then it is likely that the financing profits will swing to losses affecting their ability to invest, innovate and grow particularly in electric vehicle technology. And now after Tesla’s price cuts, other electric vehicle manufacturers will have to decide whether to cut prices themselves and accept deeper losses or risk being un-competitively priced and lose market share.
The situation facing the electric vehicle industry is not new and investing in the low-cost leader has proven to be successful in other capital intensive and cyclical industries. So, over the long term, we prefer to invest in companies like Tesla as they are the ones most likely to emerge from any downturn in a stronger position especially given the company is in a strong financial position, with no net debt and over $20 billion in cash.
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
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Past performance is for illustrative purposes only and is not indicative of future performance.