By Craig Maddock, CFP, FCSI, CIM, FICB, CFA, MBA
Vice President, Investment Management
It’s “Teslas for everyone,” as the first value-priced Model 3 cars begin to roll off the Fremont, California production line.
Like the celebrity-endorsed luxury Model S and Model X, this lower-priced Tesla (US$35,000) comes with the standard Autopilot cool factor, an advanced form of cruise control that can change lanes and adjust your speed in traffic.
Optional extras include hardware to support “Full Self-Driving Capability,” for Tesla’s promising (and in development) autonomous system. Using eight cameras, 12 ultrasonic sensors, radar and a data network, the car’s still-to-be-released features may one day let you sit back and catch up on your latest copy of CMAJ en route to work.
Automakers’ electric dreams and self-driving cars
From all-electric vehicles to the quest for fully self-driving cars, following the auto sector these days makes for an exciting ride.
Tesla’s Model 3 for the masses is chasing GM’s Chevy Bolt into the all-electric marketplace. Volvo announced that all models launched after 2019 will be either electric or hybrid. And pretty much every major automobile brand has announced plans to “go there,” with electric or self-driving vehicles.
Why we’ll take a spin in the car—but not the stock
Tesla may lead the pack for self-driving cars, but MD has taken a pass on owning this stock to date, on concerns about the company’s execution risk to meet long-term market expectations.
At over $300 per share, the stock price anticipates tremendous growth. The company hasn’t posted a single year of profit, and isn’t expected to anytime soon.
I think the only reason to invest in a new automaker and accept losses for the foreseeable future is if it’s the only company out there that’s smart enough to win. But Tesla’s not the only one investing billions of dollars in research, talent and innovation.
For instance, BMW’s existing network might easily sell more than 10 times the number of cars as Tesla, and at a profit. BMW plans to introduce an electric version of its popular 3-Series this fall—a direct competitor to the Model 3.
For now, I’d prefer to stick with proven winners, rather than speculate with hard-earned money.
Still, we’ve got our eyes on this road
If Tesla proves itself with time, we can be patient. The future for self-driving cars is bright, says John Brandt, managing director at Janus Capital Management, sub-advisor of MD American Growth Fund, and MDPIM US Equity Pool.
“We are generally quite positive on the business model and long-term opportunities for Tesla. The stock, however, does not appeal to all of our portfolio managers because of its volatility and a valuation pricing in tremendous growth.”
Tesla’s advantage, he suggests, is in the data captured by every car on the road. “Every time a driver takes control back from Autopilot, Tesla will analyze the video data to improve its software. With a growing fleet of cars on the road, Tesla’s data capture is going to grow rapidly, perhaps accumulating one billion miles of Autopilot data each year. In this way, Tesla fits into our broader tech theme around the competitive advantages of data and the increasing power of artificial intelligence,” he says.
By comparison, says Brandt, Waymo (born of Google) has done 10 years of autonomous driving, yet only has data from a fleet of about 600 vehicles.
As a technology play, data is fuel for self-driving cars
Much depends on data. Competition for an operating system (OS) for an autonomous car is evolving quickly among many well-capitalized players.
After months of rumours about an Apple car, the company confirmed it is working on autonomous operating system. China’s Baidu now has an alliance with 50 carmakers and technology companies including Ford, Daimler and Intel, and has released its Apollo autonomous driving program free, as open source software.
Closer to home, MD has a foot in this car door through MD Dividend Income Fund with a corporate bond investment in BlackBerry, a player in this automotive space. The company’s QNX technology is embedded in 60 million cars on the road today to handle everything from hands-free communications to infotainment systems.
“QNX has a significant advantage as it is the only OS that we know to have hypervisor enabled, real-time and to be ISO 26262 certified, which is the highest level of automotive safety certification,” says Saurabh Moudgil, Portfolio Manager with Manulife Asset Management, sub-advisor to MD Dividend Income Fund.
One reason we like this investment in BlackBerry is that the convertible debenture offers us an asymmetric return profile: our downside is limited and our upside has the potential to be very large.
Revved up about trends reshaping the auto industry
It’s a good bet that cars of the future will still need wheels, moving parts, some kind of engine, comfy seats and an amazing sound system—if not a traditional steering wheel. MD has holdings in more than 50 global auto sector companies across our funds and pools.
One worth noting is Magna International, a company MD clients have access to through six MD funds and three MD pools.
Whether the future is electric or autonomous, Magna is poised to participate as a manufacturer of auto parts ranging from seats to powertrains, out of more than 300 plants worldwide. It is also investing in AI systems to transform production lines.
By 2025, Magna forecasts fully autonomous vehicles will account for less than 1% of cars on the road and electric vehicles to make up 3%-6% of global markets.
Either way, complex cars call for more profitable parts: just think of those rear vision camera systems that cost five to seven times more than conventional mirrors.
So, buy a Tesla now—and offer me a ride (maybe next year)
If you’re excited about Tesla technology, I’d still say buy the car, not the stock, for instant gratification. Well, sort of: the delivery estimate for new orders of the Model 3 is at best mid-2018 or later.