In the battle of the electric vehicle revolution, Tesla might not be the best bet, according to Liontrust Asset Management’s Storm Uru.
Electric vehicles (EVs) are becoming a growing force in the automobile market as a global focus on climate change and carbon reduction, combined with falling costs, have boosted the popularity of EVs over ‘traditional’ fuel cars.
Undoubtedly one of the biggest names in that space is Tesla. It has been able to make its electric cars the ‘It’ vehicle.
Last year, the company saw a 700 per cent increase in its share price, indubitably proving its popularity with investors. But not Uru.
Uru, manager of the Liontrust Global Equity fund, recognises the investment opportunity in EVs but doesn’t agree that Tesla is the best car manufacturer to access that theme.
“We prefer to access this disruptive innovation through more traditional auto names rather than the increasingly expensive companies currently leading the charge, at least in the public eye,” he said.
Uru highlighted that Tesla, while currently worth $650bn, only sold 500,000 cars last year.
“This might sound hugely inflated but is actually reasonable if you compare it to the recent SPAC (special-purpose acquisition company) transaction of Lucid (according to its CEO, the only EV company able to compete with Tesla), which is now valued at upwards of $20bn without even selling a car,” he said.
“And what about NIO, the Chinese EV company, which was worth $5.9bn at the end of 2019 and now has a total enterprise value of $72bn?
“With eye-watering valuations across the EV universe, who is actually winning?”
He said Tesla is the leader of this industry but there is still potentially decades ahead to fully building out its necessary infrastructure, manufacturing plants, supply chains, touch points with consumers and brands that stretch across cultures and geographies, Uru noted.
The closest competition to Tesla in terms of EVs car sales is Volkswagen with more than 422,000 plug-in vehicles sold last year. This is Uru’s pick in the EV battle.
Indeed, Volkswagen is one of the top 10 holdings in his FE fundinfo Five Crown rated Liontrust Global Equity fund, accounting for just over 3 per cent of the portfolio.
Uru said: “Volkswagen is closer than any market commentor or automobile chief executive would lead you to believe.”
Being regarded as a major player in the EV space is a long way from the company’s 2009 ‘Dieselgate’ scandal when it was found to be falsifying the emissions of its ‘Clean Diesel’ range.
“Battered by the ‘Dieselgate’ scandal, the company had no alternative but to reposition its strategy to align with all stakeholders,” Uru said.
“Immediately, the company restructured its organisation to encourage innovation and reallocated significant capital from traditional internal combustion engine development to EV technology. The size of the pivot is staggering and is highlighted by the $42bn investment the company is making in this technology over five years.”
This means that, according to Uru, Volkswagen has tackled one of the two main barriers to EVs in the battle of surpassing traditional combustible cars: pricing.
Using Wright’s Law to calculate the declining cost of EVs production, Uru said it will “collapse in line with the flow of capital investment into a new technology”.
“And with EV manufacturing costs tracking this predicted decline so far, we can expect EVs to challenge traditional combustion engines within the next five years on the same price point.” Effectively EVs will be at a more competitive price versus combustible engine cars.
The launch of Volkswagen’s new ID.4 range in the US could be a chance for Volkswagen to challenge Tesla directly, the manager argued.
“At a price point of $40,000 before tax incentives, it can not only go head-to-head with Tesla’s model 3, but also compete with traditional combustion engines on a level playing field. This means that if the launch is a success (unlike Tesla’s), Volkswagen can flex its supply chain and manufacturing base and meet demand across its dealership network.
“On the other hand, Tesla will have to contend with a big new competitor with many more to follow,” he said.
The second barrier is the driving range and the distance EVs can go between charges.
“The good news on range is that technology advancements in energy efficiency and charging are progressing at a rate that makes us confident EVs will be able to compete head-to-head with combustion engines soon,” he said.
Overall, Uru added: “It remains to be seen if the auto market will end in a winner takes all when it comes to EVs, but we suspect that just like the smartphone market, where Apple now struggles to maintain a 10 per cent market share, and the streaming wars, where a Blue Ocean for Netflix has turned a bit more red, there will be plenty of room at the table for companies able to compete head-to-head with Tesla.
“We think Volkswagen more than fits these criteria and offers a much better opportunity than the high-flying EV stocks.”
Uru also manages the four FE fundinfo Crown-rated Liontrust Global Dividend fund as well as the Liontrust Global Equity fund with James Dowey as a co-manager on both portfolios.
Liontrust Global Equity has made a total return of 129.80 per cent over the past five years, outperforming the MSCI ACWI index (98.99 per cent) and the IA Global sector (93.89 per cent) in that time.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
It has an ongoing charges figure (OCF) of 0.89 per cent.