Investing in autos: are car shares worth revving up to?

With a handful of exceptions, the last five years has been awful for shares in car companies: are any worth a punt? Electric cars may fuel the fires.

Article updated: 11 January 2019 9:00am Author: Michael Baxter

If you had invested into the car industry five years ago, and spread your money across the leading players, right now you would be disappointed. Toyota is up a little, Volkswagen is flat, BMW is down 20 per cent or so, Porsche is down by about a quarter, Daimler is also down by about a quarter, GM is as flat as a particularly boring pancake and Ford has almost halved.

But there have been successes. Audi is up around 20 per cent, Fiat Chrysler has almost doubled, Ferrari has also almost doubled.

You know where I am going next. Tesla has doubled. To have really made money from Tesla you would have needed to have invested in 2013, shares are up ten-fold since then.

Aston Martin, by the way, has been unlucky, it has been caught up in stock market turbulence since the October 2018 IPO.

There are a couple of other companies worth considering, but they may not immediately jump into your head as obvious auto companies.

They are Nvidia: up ten-fold since 2014 and Alphabet, which has almost doubled in five years.

Of course, Nvidia is not a car company, it’s a chip firm, but it’s expertise in AI chips makes it a key player in the auto industry. As for Alphabet, well it seems to have an interest in just about every sector, from A to Z, but its investment in AI and linked with that, autonomous cars, makes it quite formidable.

I lump Tesla in the same bracket as Alphabet and Nvidia. Critics say it is absurd that a company whose car output last year was a fraction of the big players, is worth so much. Yet Nvidia and Alphabet made zero cars, but are both worth more than Tesla.

Tesla

There is another point about Tesla, ignoring its strength in AI, batteries and solar power, and just focusing on its scheduled auto rollout for the next two years, then frankly it’s up there with the biggest.

As Tom Randall pointed out for Bloomberg, it took Tesla ten years to make its first half a million vehicles. It should take 15 months to make its next half a million.

The cost of the batteries it makes are around 20 per cent of the cost in 2010. They are forecast to fall by at least two thirds between now and 2030.

In 2019, it plans to rollout the Model 3 in Europe. The model Y and pickup is due to be launched this year. Also this year, ultra fast chargers are due to be launched, a plant is due to be opened in China, the company is planning a utility scale battery and to ramp up solar roof production.

And the Tesla 3 is becoming a very popular car in the industry.

I do concede, it may need to raise more money, however.

Innovators dilemma

Innovators dilemma is the classic theory of disruptive technology developed by Harvard Professor Clayton Christensen. The theory is meant to explain how market leaders lose their preeminence as they fail to spot the next big change. Examples of victims of Innovators dilemma include Nokia, Blackberry and Blockbusters. One of the odd mistakes such companies make is to listen too carefully to customers. It turns out that customers rarely appreciate how their preferences will change, for example antipathy to the idea of a touchscreen phone, before the iPhone.

Electric cars are a good example. Until very recently, most of the public said they didn’t want electric cars. Jeremy Clarkson had great fun mocking the very concept. And they were wrong.

Elon Musk is to the car industry what Steve Jobs was to mobile phones. Tesla is akin to Apple (and I do believe an Apple takeover of Tesla is possible).

Other companies made the mistake of listening to customers, and now they are paying the price.

Take Jaguar Land Rover, while Tesla was bemusing car industry experts by investing in electric cars, Jaguar Land Rover was investing in diesel technology — whoops!

Credit Suisse

Credit Suisse reckons that by 2040, 14 per cent of cars will be autonomous, electric cars will be significantly cheaper to buy and run than petrol cars.

Other analysts forecast the rise of car sharing, we will book a car for when we want it, and then it will drive itself to the next customer

Our booked car may pick us up to drive us to work. Then drive off somewhere else, but be at our office at 5.30 to take us home.

We may use a different car for weekends, trips with the kids.

Winners

The winners will be companies that can fulfil niches — fancy cars for the weekend use, comfortable cars with space to work in for commuting, for example.

But I foresee less variety. If we no longer own our car, we will fall out of love with it. They will cease to be our pride and joy, for certain male drivers, no longer an extension of the anatomy.

Timing

But Credit Suisse is way too conservative in its estimates.

The rate at which car batteries are falling in price is rapid, I reckon electric cars are just a few years away from being at parity with petrol cars; and will greatly surpass them before the end of the next decade.

Climate change adds to their case.

The markets are beginning to understand this, which is why Tesla and Nvidia have such high valuations.

But I don’t think the markets have fully cottoned on, yet.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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