WHEB Commentary

Ted Franks

Tesla; our view – August Monthly

We currently hold 59 stocks in the WHEB Sustainability strategy. But when we meet existing or potential investors, the stock that most often comes up is one we don’t own. That stock is Tesla, the revolutionary American maker of electric cars.

No other stock in our Sustainability universe captures the imagination like Tesla. The product itself is thrilling. It is more than two years since, on a test drive, I found myself travelling at 40 miles per hour without touching the wheel or peddles. We’d accelerated to that speed in an instant, in a move that left my stomach turning somersaults.

Tesla’s corporate history is fascinating too, full of dynamism and opportunity. It’s hard to take your eyes off the lead character, CEO Elon Musk. By turns brilliant and charismatic, but more recently also belligerent and unpredictable, he has nonetheless led a swashbuckling adventure to change the world.

Perhaps most remarkable of all, Tesla actually is changing the world. There is a case that Tesla is the most impactful company in the world. Musk himself may have done more for environmentalism than any other single individual. This narrative is as follows:

For years, the luxury brands dictated the pace of progress towards more sustainable road transport. Led by German brands such as BMW and Mercedes, they have always preferred an incremental approach. Emissions standards did become more stringent year by year, but steady lobbying slowed them down. Electric cars remained firmly in the ‘concept’ category. Sure, there would be new, more efficient cars. But just not at a pace that threatened the historic investments made in older, dirtier models.

Tesla’s launch of the Model S in 2012 was a sharp shock to this cosy system. Within four years it was outselling the Mercedes S-Class. For more than a decade, the S-Class had been the undisputed king in the luxury sedan category.

Without a legacy business to protect, Tesla had gone straight for the jugular. It immediately proved that electric and luxury could go together. The threat to an industry already reeling from the “Dieselgate” scandal wasn’t quite existential. But it was serious, and urgent. And the response was swift.

In 2016 VW overhauled its entire vehicle development programme. Over 30 new electric models were promised in ten years. There was a similar story from Daimler, BMW and even Porsche. Tesla was the electric cattle-prod to the slow-moving herd of fattened luxury automakers.

So the impact story has been dramatic. No other brand can claim to have moved the world towards electric in the way Tesla has. The equity story is full of drama too, but of a more varied kind. Here at WHEB we could never make the pieces fit together.

Tesla has a lousy governance approach, in our view, as indeed do Elon Musk’s other companies. Its valuation was (and still is, by some measures) completely out of kilter with its prospects. Alarmingly, it seems to need that high valuation, to make it possible to raise the cash needed to make the story work. This is a terrifying circularity.

As much as Tesla has achieved, it has set itself up to need to achieve the same or more again, and again. This is now proving too much. Tesla’s ambitious production targets for its new ‘mass-market’ Model 3 have eluded it so far. And the pressure that those targets have placed the whole company under is starting to tell.

Over the summer, Mr Musk has appeared to crack up. He’s picked needless battles on twitter, admitted to relying on sleeping pills, and smoked drugs on a live webstream. Of most interest to the financial community was a potentially misleading claim about plans to take the company private.

We remain fans of Tesla (if not its stock) and hope that the revolution they started continues. But watching from the sidelines this past month has reminded us of the importance of sustainability in the holistic sense. We look for companies which don’t need to do something no-one has ever done. We like management teams that stay in control.











Recent posts

  • Tesla; our view – August Monthly
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  • The heatwave and climate change; how do we adapt? – July Monthly
  • Trump and the trade war – June Monthly
  • Tivity Health; new portfolio holding – May Monthly
  • China Longyuan; the story so far – April Monthly
  • Smurfit Kappa and the war on plastic – March Monthly
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