Tesla Just Can’t Shake The Classic Carmakers

Tesla Just Can’t Shake The Classic Carmakers
Andrew Rummer

almost 3 years ago3 mins

Mentioned in story

What’s going on here?

Everyone agrees that the future of the car is electric. But while that consensus has driven up the share prices of companies focused purely on electric vehicles (EVs), investment banks think many old-school auto stocks look like bargains.

What does this mean?

Only around 4% of the 56 million cars sold around the world in 2020 were electric – but that share is expected to increase rapidly in the coming years. Green research firm Bloomberg New Energy Finance predicts Chinese consumers alone will buy more than 9 million EVs in 2030, with Americans and Europeans each purchasing about 6 million. By way of comparison, there were 1.3 million Chinese and just 300,000 US EV sales last year.

For now, Tesla occupies the top spot among companies with the largest shares of global EV sales – particularly when it comes to future-focused battery-only cars, which currently represent a tiny fraction of old-school automakers’ revenues. But that status quo could soon shift, creating an opportunity for investors who believe that the car-building incumbents aren’t dead just yet.

Over the next few years we’ll see a business school case study play out in real time. Can the automotive giants of yesteryear – the likes of Volkswagen, BMW, and General Motorsadjust their proven production prowess fast enough to meet consumers’ environmental expectations? Or has Tesla, along with smaller EV-native firms like NIO and Fisker, already stolen too much of a march on them? 

Why should I care?

To visualize how investors are positioned for this battle, I constructed two custom size-weighted indexes using Bloomberg data. The first, which I’ve called Finimize EV Legacy Operators”, includes a global selection of traditional auto titans now looking to become more electric: Germany’s BMW and VW, America’s GM and Ford, Renault from France, Korea’s Hyundai, and China’s SAIC Motor

In the second index, called “Finimize EV Upstarts”, I’ve placed Tesla, China’s NIO and Xpeng, as well as smaller US competitors Fisker, Canoo, and Lucid Motors (represented by the special-purpose acquisition company, Churchill Capital IV, that’s currently in the process of purchasing the EV maker).

As you can see in the chart below, the Upstarts (in blue) have seen their share prices collectively surge more than 1,500% over the past five years – while the Legacy laggards (in pink) gained a mere 32%.

Chart of legacy carmaker shares versus upstarts

Dividing the Legacy index by the Upstarts index further illustrates just how much catching up the likes of VW and SAIC have to do – or, from another point of view, just how much their share prices are undervaluing the EV opportunity. The horizontal green line shows the average Upstart:Legacy price ratio over the past five or so years.

A different chart of legacy carmaker shares versus upstarts

Perhaps unsurprisingly, all those gains have left Wall Street analysts feeling a lot less optimistic about the insurgents’ future than they are about the incumbents’. 68% of all the buy, hold, and sell ratings for the companies in the Legacy index are “buys” and only 7% “sells” – compared to just 56% buys and 17% sells for the Upstarts.

Comparison of analyst ratings on the two baskets of stocks
Investment banks’ ratings for both indexes’ constituent stocks

As these firms fight it out for the future of personal transportation, I’m betting there’ll be at least some reversion to the mean green line mentioned above as some legacy automakers find a way to work the changes to their advantage. I know plenty of people will disagree – but those willing to go against the “Tesla takes all” narrative may find that history shows they were able to pick up some bargains in early 2021.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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