Tesla Proves Most Lucrative, Least Volatile Auto Stock

(Bloomberg Opinion) -- Nikola Tesla electrified the world in the 19th century when he created the alternating-current motor and anticipated 21st century mass communication with his work on wireless transmission of voices, images and moving pictures. Unlike the Serbian-American inventor who died destitute at 86 in 1943, his namesake Tesla Inc. is so esteemed eight years after becoming a public company that its valuation is greater than that of every other automaker except Toyota Corp., Volkswagen AG, Daimler AG and Bayerische Motoren Werke AG. Tesla's market capitalization per vehicle produced dwarfs all of them, including No. 1 Toyota by a multiple of 25.

And that was before the founder and chief executive officer, Elon Musk, said he was thinking about reorganizing Tesla as a private concern. He was responding in part to analysts who have become increasingly bearish as the stock became more robust.

Tesla's perceived failings include "burning through cash" (reported 135 times by Bloomberg News since 2013), more short-sellers than 499 of the companies in the S&P 500, management turnover, and a temperamental leader. This is the noise obscuring the strengthening signal that investors — like owners of the Model S, Model X, Model 3 and Roadster in 28 countries — embrace Tesla as the same disruptive force that enabled Amazon Inc. to overtake the giant book sellers 20 years ago.

The dichotomy between shareholders and everyone else opining about Tesla was revealed this month when the Washington Post led its Economy & Business section with an article headlined: "Inside the Tesla Factory: Burning cash, trying not to burn out." Tesla shares within 24 hours rallied more than 16 percent — the biggest one-day gain since 2013 — after Musk said not for the first time that the Palo Alto firm doesn't need any money and will be profitable.

Just as Thomas Edison dismissed Nikola Tesla's invention of AC power transmission as impractical, so does the media's burning-through-cash fixation miss the significance of Tesla shares proving the least volatile and most lucrative among its five largest competitors during the past five years, according to data compiled by Bloomberg. That's because Tesla sales increased 10 times since 2013, a rate that is exponentially faster than revenue growth for Fiat Chrysler (1.2 times), Ford Motor Co. (1.1 times) and General Motors Co., whose revenue decreased 8 percent. Tesla's market capitalization during the same period increased 3.3 times, easily surpassing Fiat Chrysler (2.3 times), GM (1.1 times) and Ford, which lost 40 percent of its value, according to data compiled by Bloomberg.

The best is yet to come for Tesla and its zero-emission vehicles. Tesla sales are expected to grow 72 percent in 2018, the most among 40 global automotive peers, according to 26 analyst forecasts compiled by Bloomberg. Tesla will remain No. 1 with a growth rate of 40 percent next year and 24 percent in 2020. The Model 3, which received the highest owner satisfaction rating in its category from Consumer Reports, "will become the best-selling entry-luxury sedan in the U.S., outpacing the BMW 3 Series and Mercedes-Benz C-class this year and in 2019," said Bloomberg New Energy Finance in a June 13 report. "Tesla could compound falling sales at incumbent automakers like Audi, BMW, Daimler and Infiniti," according to the report.

Money managers, meanwhile, are showing their explicit preference for Tesla.

Recent filings with the Securities and Exchange Commission show that 194 mutual funds invested $9.8 billion in Tesla shares, or about 1 percent of the total assets of these funds, while 361 funds invested $6.9 billion in GM, or 0.7 percent of their total assets, and 570 funds invested $12.3 billion in GM, Ford and Fiat Chrysler, according to data compiled by Bloomberg. At the same time, the 194 funds holding Tesla produced a 2.67 percent risk-adjusted return during the past three years, when the 570 funds holding the other automakers provided a 1.99 percent return after adjusting for share-price volatility.

The bottom line: Tesla, as the Washington Post and my colleagues at Bloomberg Opinion repeatedly acknowledged, is spending money at a rate considered unsustainable. But shareholders remain indifferent to this perceived peril because Tesla is creating increasingly more value the same way Amazon did more than a decade after reporting no earnings.

Proof can be found among the most-successful money managers, such as Joshua Spencer's T.Rowe Price Global Technology Fund, which has a 209 percent total return (income plus appreciation) the past five years and is No. 1 among 231 similar funds. Under Spencer, Tesla's weighting increased to 13 percent as of March from nothing (Microchip Technology was the second-largest weighting at 5.7 percent), according to data compiled by Bloomberg. The Fidelity Select Technology Portfolio produced a 97 percent total return the past 3 years and is No. 1 among its peers for the period, mostly because manager Charlie Chai made Tesla one of his top 3 investments since the second quarter of 2017.

While Bloomberg News reported Tesla "burning through cash" 11 times in 2015, 37 times in 2016, 35 times in 2017 and 52 times so far this year, the shares rallied 7.9 percent in 2015, 45.7 percent last year and 14 percent so far in 2018 (they declined 11 percent in 2016) — proving if nothing else that investors aren't concerned about the growing pains because they already envisage the day when the vehicle of choice for most people is electric. That would be 2040 when 55 percent of new car sales are electric vehicles, according to Bloomberg New Energy Finance.

In the meantime, Tesla investors, like its customers, have traveled into the future, and they aren't turning back.

(With assistance from Shin Pei)

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew A. Winkler is a Bloomberg Opinion columnist. He is the editor-in-chief emeritus of Bloomberg News.

©2018 Bloomberg L.P.