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Tesla: feel the force

Electric vehicles

Tesla: feel the force

Opposing a future of clean energy is a gloomy status for rival carmakers

Electric vehicle manufacturers are among the contenders for a place in the new energy economy © Bloomberg

Electric imaginations are required of Tesla shareholders. An equity valuation of almost $600bn envisages a future in which the company dominates vehicle sales and automotive technology.

Perhaps it will. Electric vehicle manufacturers are among the contenders for a place in the new energy economy. Investors continually bid stocks higher, spurred on by government green deals. Opposing a future of clean energy is a gloomy status for rival carmakers.

Tesla is now worth as much as the eight largest legacy manufacturers. How does that stack up against reality? EVs accounted for just 3 per cent of global sales in 2019. But market share is accelerating rapidly. It could hit 17 per cent by 2025, rising to 40 per cent by 2030, thinks UBS. A new, more climate-friendly US administration could even make that estimate look conservative, said analyst Patrick Hummel.

Imagine a world where every other new car sold is an EV by the year 2030. If half of all EVs sold came from Tesla then the company looks undervalued. An 8 per cent operating margin means a current valuation of just 10 times earnings — below the 15 times at which carmakers have historically traded.

Is this possible? Around the world, 60m cars are expected to be produced this year, according to S&P. Tesla is expecting to make 500,000 — a small fraction of the total. But boss Elon Musk, never one to underplay his ambitions, says that he expects Tesla to produce 20m cars by 2027-30.

Even so, combustion engine production in 2030 would still be worth almost $1.4tn in market value using historic metrics. That is a third more than legacy manufacturers are currently valued.

Tesla’s plans will require large funds to overpower legacy car companies. Among entrenched carmakers Volkswagen EVs are selling best in Europe. Tesla’s biggest lead is in its cost of capital. An aptly named $5bn “ATM” share sale will allow it to tap the market for funding as needed. Battery production may be its next advantage. Until then, capacity bottlenecks are expected to be the biggest constraint on future production. Domination is far from certain.

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