Why does Cathie Wood have a significant investment in Tesla?
Cathie Wood’s Ark Innovation ETF has beaten the S&P 500 itself in the last five years with a 490% profitability, while the general market has only gained 105%. And it is heavily invested in the electric vehicle company Tesla, accounting for 10% of the total, according to Trevor Jennewine on Nasdaq.com.
“Given Cathie Wood’s reputation, investors should take her position seriously,” says Jennewine.
What is the opportunity?
At the end of last year, there were 10 million electric cars on the roads worldwide, significantly more than the 17,000 in 2010. That rising popularity has been driven by several factors: improvements in battery technology, falling costs, government-backed purchasing subsidies, and a growing interest in reducing carbon emissions.
This trend is expected to continue. According to Allied Market Research, the global electric vehicle market will grow by almost 23% annually until 2027, reaching 803,000 million dollars. Tesla is at the forefront of that trend.
In March 2021, the company had an electric vehicle market share of 16%, while the next closest competitor had only 9%. That puts Tesla in a good position.
Since October 2016, all Tesla vehicles have been shipped with the latest autopilot hardware. And with over 1 million vehicles on the road, Tesla has access to far more real-world driving data than any of its rivals. In fact, its fleet had logged more than 3 billion miles on autopilot as of February 2020. That gives Tesla a significant advantage in the race to build a fully autonomous vehicle.
Tesla plans to launch an autonomous shared ride network in the future. And according to Wood, this market could generate more than $ 1 trillion in profits by 2030. Ark also believes that autonomous automakers could generate $ 250 billion in profit by 2030. That puts Tesla at the forefront of several mass markets.
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Financial performance
At the moment, Tesla manufactures vehicles at Fremont Factory in California and Gigafactory Shanghai in China. The company believes that these two facilities have a combined capacity of 1.05 million vehicles per year. But it produced only 509,737 vehicles in 2020, about half its estimated capacity.
However, the firm achieved record production and deliveries in the first quarter of 2021, increasing those figures by 76% and 109%, respectively. The Model 3 became the best-selling premium sedan in the world, surpassing the BMW 3 Series.
“Tesla’s top-of-the-line performance has been strong in recent years, and its bottom line is improving, although most of the first quarter net income still comes from the sale of Bitcoin and regulatory credits,” Jennewine notes.
To boost production capacity, the Gigafactory Berlin is being built, which will manufacture the Model Y; and the Gigafactory Texas, which will manufacture both the Model Y and the Cybertruck. With these online facilities he believes he can increase deliveries by 50% per year over a multi-year horizon.
According to Grand View Research, the total number of electric vehicle units will grow by 42% annually until 2027. If Tesla can outperform the overall industry growth, it will gain market share in the years to come.
Valuation concerns
Tesla shares have a market capitalization of $ 575 billion. In perspective, that means the company is worth more than Toyota, Volkswagen, Daimler, and General Motors combined. But just 12 months ago, Tesla’s market capitalization was 150 billion, its value up 280% in the last year.
“Not surprisingly, Tesla shares look quite expensive. In fact, to 18 times sales and 597 times profits, It is an understatement to say that it is traded with a higher valuation. The vast majority of automakers don’t come close to those multiples. Therefore, investors must ask themselves an important question: can Tesla justify that price in the long term?
“Personally, I own Tesla and have no plans to sell. I think this electric vehicle manufacturer could change the world in the way that most companies only dream of. That said, there is no denying its absurd assessment. Wall Street clearly has high expectations for Tesla, ”concludes Jennewine.
