Shorting Tesla is a fool’s errand. In a nutshell, that’s the conclusion of Carson Block, the outspoken founder of the hedge fund Muddy Waters Capital. Block briefly bet against the stock before closing out his position some time ago.
Since the start of last year alone the electric vehicle manufacturer’s shares have risen more than sixfold, making Tesla the most valuable automotive company in the world.
Investors have put Tesla on a pedestal: its enterprise value is equivalent to 67 times forecast earnings before interest, tax, depreciation and amortisation (ebitda). Justifying that eye-watering valuation hinges on ramping up capacity enough to break into the mass automotive market.
The group’s celebrity chief executive Elon Musk has said its lofty aim is to produce 20 million vehicles a year by 2030. Last year it delivered just over half a million, with a further 206,000 during the second quarter of this year.
Two manufacturing plants are due to start production this year, which will be mainly dedicated to rolling out Tesla’s lower-cost Model Y car.
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The Berlin site will help to service European demand, while a plant in Austin, Texas, will make access to the central United States and its east coast faster and cheaper. The start of production at those sites is nearing just as supply shortages in semiconductors complicates matters, which threatens to dampen the mood. Using alternate chips has helped to offset some of the supply chain pressure, but the global inventory of available supply of Tesla cars shrank to nine days during the second quarter, from 17 days during the same period last year.
Hitting production milestones will be crucial to maintaining the market’s faith. Increasing production volume and reining in operating costs pushed the much-watched automotive margin to 28.4 per cent, above Wall Street expectations.
Making the Shanghai Gigafactory its primary export hub this year formed part of the drive to bring down production costs. The US brokerage Wedbush estimates that Tesla makes 25 per cent more off a car sold in China, thanks to the lower cost of production there. The investment bank Goldman Sachs predicts the higher-cost plant in Fremont, California, which accounts for 57 per cent of annual installed capacity, will drop to 33 per cent by 2023. Those margin savings can be reinvested into bringing down prices further, the brokerage thinks.
Cutting the cost of producing cars is vital for growing the customer base. Last month Tesla launched a lower-cost version of its Model Y in China, where it is being challenged by homegrown electric vehicle brands such as Zeekr, Nio and Xpeng and greater regulatory scrutiny amid complaints over quality.
The announcement this week that US safety regulators would open an investigation into its Autopilot driving system after crashes involving emergency vehicles was another dent to confidence. For a company that thrives on its reputation for being technologically revolutionary, bad PR around its Autopilot software is troubling for the stock. The shares are down 5 per cent since the start of this year.
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But Muddy Waters’ Block has it spot on: Tesla’s success with investors is not because it has scale in terms of manufacturing base or unit sales but because of the magnitude of its capital base. Last year Tesla raised $12.3 billion via three market transactions in ten months.
The cult of Elon is powerful, as are Tesla’s first-mover advantage and the decarbonisation driver for the EV market. But the weight of expectation baked into the shares’ heady valuation makes it difficult to recommend buying in.
ADVICE Avoid
WHY The high valuation makes Tesla highly prone to a derating if it can’t take more market share
Sirius Real Estate
It’s a rare corporate update that doesn’t avail itself of the opportunity to complain about the burden of rising supply chain costs. But for the industrial landlord Sirius Real Estate that is a growing source of new revenue as more companies look to shift their manufacturing processes closer to home.
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And it’s one reason the German property group is expanding its estate, purchasing four business parks and an extra parcel of land for development for a total €84.8 million.
As far as the commercial property market is concerned industrial assets have been the winner throughout the pandemic, which has been reflected in the premiums attached to publicly listed landlords in the sector, versus even forecast net asset values.
For the real estate investment trust Sirius that premium stands at 50 per cent against consensus forecast NAV at the end of March next year, as the shares reached a record high.
But fashionable assets mean Sirius is having to stump up more to expand its portfolio, which could eat into returns. One way it tries to limit that is by buying up assets that are “grotty and unloved” and/or have a significant degree of vacancy. It then refurbishes them, adds in managed services such as telecoms and IT, and re-lets the space at a higher level. A joint venture with the French asset manager Axa provides a more capital-efficient way of gaining access to higher-ticket acquisitions.
It’s a strategy that has so far paid off. Over the year to March the annualised rent roll grew 7.6 per cent and, more importantly, notched up a 5.2 per cent rate of organic growth.
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Its top ten tenants include the defence group GKN and the automobile giant Daimler, but it also lets a sizeable proportion of space to the Mittelstand.
Collection of rent and service charges has averaged more than 98 per cent since the onset of Covid, which translated into an increased dividend payment last year and a further rise anticipated for the current fiscal year.
Analysts at Berenberg raised their target price on the stock to 130p, on the back of more bullish underlying rental growth expectations. But that’s a level the shares are already close to reaching.
ADVICE Hold
WHY Growth prospects are already well accounted for
