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Jan. 23, 2021, 10:20 a.m. EST

Why Tesla is not a safe stock for long-term investors 

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By Rob Hansen

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3. A consumer base that faces high switching costs. 

Unfortunately, Tesla only has the first ingredient and its first-mover advantage may erode.

While Tesla currently has superior battery technology, competition is coming fast. According to Wolfe Research, new EV entrants have raised $36 billion over the past two years. At the same time, old-guard automobile OEMs have spent $50 billion on research & development and capital expenditures for EV technology. Many governments worldwide have heavily incentivized EV production. With investors and manufacturers clamoring for this growth, Tesla’s first-mover advantage is likely to be transient. 

Battery technology is rapidly evolving and Tesla’s dominant position is not guaranteed. Currently, Tesla has a significant lead in battery technology with plans for cobalt-free batteries (cobalt is expensive and difficult to procure). However, most experts believe that solid state batteries are the holy grail for EVs as they go further (800km/500miles), charge faster and last longer. While solid state batteries have been difficult to develop thus far, rivals including Toyota /zigman2/quotes/200537742/composite TM +1.09% , QuantumScape /zigman2/quotes/219305490/composite QS +0.96% and Samsung SDI /zigman2/quotes/202065513/delayed KR:006400 +1.01% believe they can achieve commercial production in the next 10 years. 

High hopes for services

Even if Tesla reaches expected volume targets because of faster-than-expected EV adoption, Tesla’s stock still incorporates too much value for the potential of its other businesses. Simply put, embedded option value in Tesla’s other businesses factor in a near certain probability of success, despite risks that may crimp profitability. 

Most importantly, competitors could begin to provide some of Tesla’s service-oriented offerings for free. Old-guard automobile OEMs are not known for being rational, especially during cyclically weak periods. At the same time, numerous EV startups are eyeing Tesla’s cake too. Performance upgrades, supercharging fees, and maintenance packages are fee streams that are easy to disrupt as OEMs begin to deliver connected EVs with similar features. 

Tesla Insurance is under threat too. Rival GM has its own insurance offering in the works, which is likely to be based on driver habits using data collected from the automobile. Once other OEMs have developed EVs, data collection will ramp up quickly and insurance offerings may follow. 

There are also safety risks in Tesla’s potential autonomous driving and mobility packages. Tesla is the lone creator of autonomous vehicle technology that eschews an important vision system called Lidar (Light Detection & Ranging). This system allows a vehicle’s computer to create a 3D representation of the environment around a vehicle and provide a higher level of safety. The vast majority of experts agree that neglecting this technology in favor of cheaper radar and camera-based options poses safety risks longer term.

There is no denying that Tesla has disrupted the automobile industry and likely for the better. It has compelled the world to move forward from a 150-year old internal combustion engine technology and forced competitors to redesign vehicle architecture from the ground up. Tesla has developed impressive manufacturing capabilities and taken the lead in battery design and intellectual property. Tesla also has potential in its services and ancillary businesses too. 

While there is a lot to like in the Tesla story, at this juncture there are too many risks in the Tesla thesis and a valuation that leaves little- to no margin of safety for a long-term investor.

Rob Hansen is a research analyst with Vontobel Quality Growth, a boutique of Vontobel Asset Management. Vontobel Quality Growth holds shares of Samsung Electronics but not of the other companies mentioned in this article.

More: I’ve pulled out all the stops for Tesla — but can’t find the upside on the stock

Also read: ‘Big Short’ investor says his big Tesla short is getting ‘bigger and bigger’

/zigman2/quotes/200537742/composite
US : U.S.: NYSE
$ 155.77
+1.68 +1.09%
Volume: 220,299
April 13, 2021 4:00p
P/E Ratio
15.18
Dividend Yield
2.42%
Market Cap
$215.57 billion
Rev. per Employee
$765,642
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/zigman2/quotes/219305490/composite
US : U.S.: NYSE
$ 42.25
+0.40 +0.96%
Volume: 7.12M
April 13, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$15.91 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/202065513/delayed
KR : S. Korea: KRX
697,000
+7,000 +1.01%
Volume: 486,821
April 14, 2021 3:30p
P/E Ratio
81.10
Dividend Yield
0.14%
Market Cap
₩43516.55 billion
Rev. per Employee
₩1.02B
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