Elon Musk is often called the Thomas Edison of his age — for good reason. His ambitions range from space travel and underground hyper-speed railways to brain-computer interfaces.
Mr Musk might be forgiven if his broad sweep of interests had distracted him from his day job. But they have not. Overnight on Wednesday, Tesla posted stronger than expected results for the second quarter. The electric carmaker produced a profit of £104 million between April and June, defying Wall Street’s consensus forecasts. It has now posted four consecutive profitable quarters for the first time in its history, making it eligible for inclusion in the S&P 500.
The elevation would befit its status as the hottest US stock of the moment; its shares have advanced more than 300 per cent since the start of the year. The company, which Mr Musk has built from scratch over nearly two decades, stands among America’s 20 largest publicly quoted companies and is the most valuable carmaker in the world.
Joining the S&P, America’s main index, would have clear advantages. New cash would pour into the shares from tracker funds, reducing Tesla’s cost of capital. The question is whether investors thinking about taking a bet on Mr Musk should follow the tracker crowd.
They should not take the decision lightly; Tesla’s valuation is jaw-dropping. The stock market values it at $300 billion, yet over the past four quarters it has generated cumulative net income of just $368 million.
The source of these profits should give them pause for thought. In the past 12 months, Tesla has reaped more than $1 billion from selling emissions credits to rival carmakers that are not building enough electric vehicles. As Mirabaud, the broker, put it: “Regulatory credits have been the difference between positive and negative bottom line.”
They should also consider Tesla’s production figures. The group turned out 82,272 cars in the second quarter, down only 5 per cent year-on-year, which was a creditable feat given the coronavirus disruption. Yet its production figures are dwarfed by rivals. Toyota, for instance, made nearly 11 million vehicles last year.
Mr Musk’s supporters recoil at comparisons with the establishment, saying that Tesla is much more than a mere metal-bashing car manufacturer. They are, of course, right. He has built the company around a centralised software platform, giving him a huge advantage over his rivals in the development of electric cars and autonomous driving. Tesla’s battery technology is considered superior to competitors and Mr Musk believes it will become integral to the green energy systems of the future.
Yet to buy Tesla shares at these elevated levels, you must believe that the company can dominate the nascent electric car market, that its software platform will become the industry standard and that its bets on green energy will pay off.
It is possible to both admire Mr Musk’s ambition and what he has achieved so far but also have a sceptical view of Tesla’s share price. Everything has to go right — and then some — for this company to grow into its current valuation.
This column advised potential investors to avoid Tesla in January on the basis that it was overvalued. Since then, the stock has doubled. Its valuation has become even more unmoored from conventional analysis, and with an army of Robinhood investors piling in, Tesla is now a pure momentum stock.
The share price could just as easily surge to $3,000 as tumble back to earth. Buying the shares at these levels is gambling, not investing, and prospective shareholders would be wise to avoid.
ADVICE Avoid
WHY Tesla’s valuation is unmoored from reality and buying its shares is a gamble
Alliance Trust
Assessing the success of stock-pickers during a relatively short period of market turmoil can perhaps be unfair. Fund managers always want to be assessed on their long-term performance (Greig Cameron writes).
In 2017, Alliance Trust reshaped its board and moved to an outsourced asset manager model. The trust is now fully focused on global equities.
One of the main attractions of Alliance, formed in 1888 and based in Dundee, is its dividend. A record of 53 consecutive years of income growth does not come easily.
Investors will have been reassured yesterday by Alliance’s plans to lift its dividend by 3 per cent in 2020. An interim payment of 7.19p for the six months to the end of June is proposed and Gregor Stewart, the chairman, indicated that he wants the dividend to rise for a 54th year “and beyond”.
Alliance has over £109 million of distributable reserves with its 2019 payout costing £45.7 million. The board hope to put its £645 million merger reserve pot into distributable reserves with a motion at next year’s annual meeting for approval.
The multi-manager stock-picking began in April 2017 and is overseen by Willis Towers Watson. Managers were asked to choose portfolios of up to 20 stocks. The mix of value and growth strategies is supposed to help Alliance be a steady performer.
For the six months to the end of June, Alliance saw a 5.8 per cent drop in its total shareholder return compared with a 0.5 per cent rise for the MSCI All Country World Index. Compared with April 2017, total return is 25.9 per cent, just behind the benchmark’s 26.2 per cent.
Mr Stewart pointed out that the coronavirus pandemic meant net assets fell almost 21 per cent from £2.9 billion at the close of last year to £2.3 billion at the end of March.
A rally produced an increase to £2.7 billion by the end of June and Mr Stewart said it reiterated his faith in the investment process to “deliver significant outperformance in the long run”.
Alliance’s shares are below the 850p they started 2020 at but are some way beyond the trough of 545p it experienced in March. Yesterday they edged up 0.6 per cent to 815p.
ADVICE Hold
WHY Attractive dividend at a time when income may be difficult to guarantee
