VW vs Tesla: who will win the EV thematic?

We all love to hear a bull and a bear debate a stock, but no stock seems to get the blood boiling as much as Tesla.

It was supposed to be a benign conversation about ESG, but instead, it became the battle of the Titans as to whether Tesla will keep growing or is it time to short? At today's Morningstar Investor Conference at Sydney's International Convention Centre, Rajiv Jain chair and CIO of GQG Partners and Scott Berg, portfolio manager for the Global Growth Equity strategy at T. Rowe Price presented to an audience about what's next for global equities. 

So, where does Tesla factor in? 

$0 is the right price target for Tesla: Rajiv Jain

Suitably provoked, Jain came out with the strong position that zero is the optimal price target for buying into Tesla and he sets out three key points for this: 

#1 VW makes more EVs 

Forbes reported in March this year that Tesla's market share was down one percentage point from 2019 (Tesla took a 16% share of EV sales in the global market in 2020, as opposed to 17% in 2019).  

"In the fourth quarter of 2020, VW actually sold the most EVs (191,000) compared with 183,000 for Tesla," wrote Forbes. Although this includes hybrids, Tesla's market share of pure-electric vehicles is higher. 

Not only is VW making more EVs, said Jain, its share price is only seven times earnings. 

#2 Tesla has significant governance problems 

"I mean the accounting is egregious, to say the least," said Jain. 

Tesla's CEO Elon Musk has been under the watchful eye of the SEC, after settling fraud charges in 2019. He's once again in the spotlight for his tweet, with the Wall Street Journal reporting yesterday that Musk has violated his court enforcement that arose during settlement proceedings. 

#3 EU and Chinese consumers are likely to favour other EV providers

"Tesla was the first out the gate, obviously, and that benefitted them," said Jain. 

But he believes the first-mover advantage is over. Tesla has lost market share in Europe so that it's now in single-digits, said Jain. 

Meanwhile, Jain said, China has some serious concerns about Tesla's safety features. South China Morning Post reports that Tesla's sales in April dropped by nearly 10,000 vehicles over consumer concerns for safety. 

Lean back in to Tesla's growth: Scott Berg 

Berg said he sold out of 90% of the fund's Tesla holdings last year during the value rotation, but now he believes the biggest part of the value rotation is over and it's time to "lean back in as its price gets lower". 

 "I think Tesla is the real deal is no way that stock's going to zero," he said. 

The key points of Berg's rebuttal are:

#1 Competitors aren't really delivering, just announcing

Berg argues for every time a competitor like Volkwagon comes along and promises to compete, they drastically underdeliver. He refers to Mercedes Benz who announced a competitor EV two and half years ago, and "the car is still not available for sale 18 months after launch and costs 20% more," he said. 

#2 No-one can match Tesla for range 

The technological capability in Tesla is so far unrivalled. In an EV, range (or how far it can drive before recharging) is incredibly important. The value proposition of EVs declines with lower range vehicles

"There is still not an EV for sale today whose range beats the Model S, which is already nearly a 10 year old car," said Berg. 

According to Car Magazine, the top three EVs by range in 2021 are the Tesla Model S, the Model 3 and the Model X.  

#3 The need for vision over earnings 

One of the big arguments about Tesla is whether or not it can ever make the earnings to catch up with its current pricing. But Berg believes in the vision, rather than today's earnings. He said the same was said of Amazon in the early days. 

"Years ago, some very famous investors in Australia, said 'Come on, what's this Amazon thing? They make no money'," said Berg. 

"Well," he continues, "I've made 52 times my money in Amazon in 12 years." 

Tesla battleground

It's a conversation that is playing out more broadly. It's the stock people love to love and love to hate. 

Most notably, Cathie Wood who is a prominent Tesla bull, predicted back in 2018 that Tesla would hit US$4000 a share, which it did. It was an astounding prediction and she was near ostracised for her faith in the company. Her latest prediction is that Tesla will continue to grow up to US$6000 a share by 2023. 

On the other hand, Michael Burry, of The Big Short fame, has put US$530 million on shorting Tesla. Recent reports on his SEC filing state that the short is of unknown price and duration. 

Conclusion

Well. Bull or bear, value or growth - we look forward to seeing how the global equities market plays out more broadly. 

Jain believes this market is different to the dot-com era, but there are definite similarities.

"The opportunities now are a lot more nuanced ... having survived the dot-com bubble and the collapse thereafter I feel that these kind of regime shifts are critical," he said.

If you don't navigate this market carefully, said Jain, a fund manager can "get taken out on a stretcher", particularly if inflation hits and businesses revert to normalised valuations, rather than the extremely high multiples we see today.

Berg is almost diametrically opposed to these beliefs. He thinks 70-80% of the value rally is over and it's "time to fall in love with growth stocks again". 

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