Could Tesla Shares be Overtaken by Competitors?

It may be years before electric vehicles replace petrol cars. But are there investment opportunities today in this technology?

Karen Kwok 27 June, 2017 | 2:00PM
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When it comes to electric cars, the first company that springs to many investors’ minds would be Tesla (TSLA).  For a company that started in 2003, with aims to transition the world from petrol to electric cars, the share price of the Tesla has done extremely well over this period.

Tesla now has a $62 billion market capitalisation, with its share price rising from $107 four years ago to its current level of $377.

However, Ben Preston, manager of global equity strategy with Orbis, a global investment firm, says he has doubts about the future trajectory of Tesla shares.

He points out that if you look at the share price today, then it has delivered good value to date for investors. “Being an early leader of the electric vehicle industry is great for them. However, as the rest of the industry catches up, Tesla will find itself facing a lot of competition.” He points out that other companies have developed “decent electric vehicles” that has simply not been manufactured in scale numbers to date. He adds: “Personally we don’t see great value in Tesla shares, but good luck to shareholders [who are sticking with them].”

Morningstar equity analysts view Tesla as a one-star stock, meaning analysts believe the stock is trading above its estimate of “fair” value.

“For a young company like Tesla, we think long-term potential is the more important question and the value driver, but tremendous uncertainty surrounds the story. The market has very high expectations for the stock, so a slowdown in growth, execution problems, or lack of capital could lead to a severe decline in the stock price.

“The success of Tesla's move into energy storage is highly uncertain, and a SolarCity acquisition adds to that uncertainty,” said David Whiston, senior equity analyst with Morningstar.

Traditional Car Companies Embrace Electric Vehicles 

Instead, as share prices of traditional car companies are under the cloud because investors are so excited about electric vehicle, it could be an opportunity to invest in traditional car companies that embrace the change in the car industry.

“With forthcoming electric models announced by Chevrolet, which is part of the General Motors (GM) and BMW (BMW) for 2017 and Volkswagen (VOW3) announcing its ambition to produce more than 2 million electric cars a year by 2025, there will be a wide range of aspirational electric cars offering high performance and long range at an affordable price point. This should increase penetration of the total car market,” said Sanjiv Tumkur, head of equity research with Rathbones.

General Motors, BMW and Volkswagen are all rated four-star by Morningstar analysts, meaning analysts believe their shares values are trading below their estimate of “fair” value.

UK Government Backs Electric Vehicle Infrastructure

The consensus is that in future far more people will be driving electric cars. But Orbis’s Preston points out that there are still a lot of uncertainties surrounding this developing technology.

“A lot will depend on the government policy and infrastructure: such as how many stations are built to recharge car batteries,” said Preston. In November 2016, the UK Government has pledged £80 million to improve changing infrastructure for electric vehicle owners.

Preston pointed out that take up will also depend on cost: whether the cost of buying an electrical car starts to fall and whether it becomes more cost effective in future, when compared to existing petrol or diesel technology.

It’s clear that Government wants to encourage this trend. Former transport minister Andrew Jones said: “Electric cars are [becoming] greener and cheaper to run, and we are making them more affordable, spending more than £600 million between 2015 and 2020 to support the uptake and manufacturing of ultra-low emission vehicles here in the UK.”

However, there are still more hairpin curves to go through on the road ahead for electric vehicles.

The think tank, the Green Alliance pointed out that the UK’s energy networks are not ready for the surge in electric cars and solar panels that is coming within the next few years.

Batteries Key to the Next Stage of Electric Car Development

One of the key drivers in developing electric vehicles is better battery technology. Cheaper, lighter and more powerful batteries are crucial for electric vehicles to be cost-effective, energy efficient and fast.

“Electric vehicles were first devised in the 1830s and used to be far more prevalent. At the beginning of the 20th century they represented around a third of all automobiles. However electric vehicles lost out to the internal combustion engine a hundred years ago in large part because battery technology at that stage was too basic to allow higher speeds,” said Rathbones’ Tumkur.

Electric cars are less complicated in terms of the car structure when compared to cars with traditional fuels. Electric cars with batteries offer higher energy efficiency relative to traditional fuelling cars as, converting around 60% of electrical energy from the grid to power at the wheels. Comparatively, for cars using gasoline as their power fuel, their internal combustion engine only converts 20% of the energy stored in gasoline to power at the wheels.

“Therefore, the battery is currently by far the most expensive component in electric cars, so the shift to electric cars will depend on how quickly the cost of batteries can be reduced,” said Orbis’ Preston. Average electric vehicle battery prices are predicted to fall to $109, from $270 in 2016, according to data provided by Rathbones, the wealth management firm.

Preston sees investment opportunities in companies producing electric car batteries. Among four companies will control almost half the market of electric vehicle batteries, Samsung SDI (006400), LG Chem, BYD and Tesla Gigafactory, Preston believes Samsung SDI is an investment opportunity as the stock looks cheap.

“If you look today, Samsung SDI makes no money from car batteries – in fact, it’s slightly loss‐making. And some people will say it will forever be this way. But if there comes a time when the demand exceeds supply in electric vehicles – as we think it will ‐ that’s going to change,” said Preston.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk