Why Tesla Will Lose Its Lead
As Tesla's fortunes grew, so too did investor pessimism towards BMW
Investors are often drawn toward the 'next big thing' and the allure of rapid growth that comes along with it.
The problem is that too much excitement can easily lead to too much capital chasing too few ideas. This pushes up valuations and ruins the investment opportunity.
The changes sweeping the automobile industry are a perfect example in today's environment.
Just look at Tesla. In 15 years, it has built arguably the best electric vehicles on the planet, a premium brand, and an early lead in the underlying technology. But unless you have been living in a cave, you already know this.
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Trading at over nine times the value of its net assets - the value of all assets such as factories, inventory and software, after deducting all liabilities - Tesla has all of the positives and then some priced into its shares.
Now consider one of its key competitors: BMW. Investor pessimism has rarely been this extreme in the company's 27-year listed history. Trading at less than the value of its net assets, BMW shares are near valuations last seen during the Global Financial Crisis.
Not only do investors think that BMW will lose market share to Tesla, the market also seems to believe that its earnings have peaked and its best days are in the rear-view mirror.
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We see things differently. We see a very high-quality business trading at a discount to its history.
For much of its history, BMW has delivered attractive returns on capital, compounding shareholder returns at between 3% and 4% above the world index since listing in 1991.
We also think it is a mistake to write off BMW's prospects in electric vehicles. Its share of the electric vehicle market is about 8% - already in line with Tesla's share.
Furthermore, we expect Tesla's early technological lead to close over time because history has shown that technology differentiation in the auto industry does not persist.
Besides BMW, we have found similar contrarian opportunities in the automobile sector, such as Honda and selected tyre producers.
While the threat of disruption is real, we are willing to bet that these risks are more than priced into the shares.
Ed Blain is a portfolio manager at Orbis Investments
Bull Points
• BMW is a rare exception to its peers, trading near its crisis-level valuations
• Disruption risk priced into shares
Bear Points
• BMW and other auto shares may decline sharply in a slowdown
• A faster-than-expected transition to autonomous vehicles may cause the entire auto market to shrink
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