Don't Ignore This 'Half-Truth' Like Most Investors Today
This race is still in its early innings... Tesla's market dominance isn't what it used to be... The first-mover in a very crowded market... Don't ignore this 'half-truth' like most investors today... Lessons from 'century club' companies... Discovering two great ways to profit from the EV revolution...
If you listen to most investors, Tesla (TSLA) is the landslide winner in the electric-vehicle ('EV') race...
They've pushed the EV maker's market cap to roughly $580 billion today.
In other words, in just 18 years since Elon Musk founded the company, investors now consider Tesla to be one of the top 10 most-valuable publicly traded companies in the world... In terms of market cap, it's considered more valuable today than longstanding institutions like JPMorgan Chase (JPM), Visa (V), and Johnson & Johnson (JNJ).
And when it comes to automakers, it's not even close...
As we've mentioned in the past in the Digest, Tesla's current valuation is higher than several other major automakers combined. For example, right now, it's roughly the size of Toyota (TM), Volkswagen (VWAGY), Honda (HMC), Ford (F), and General Motors (GM) altogether. It's more than double the valuation of Toyota, which is around $255 billion right now.
But as I (Mike Barrett) will explain in today's essay... I don't buy it moving forward.
Sure, Tesla has been the undisputed champion of this space in investors' eyes so far. But here in the Digest, like many folks, we're more concerned with what's coming next than what has already happened... And we're still only in the early innings of the EV race.
As you'll see today, Tesla's first-mover advantage is already subsiding... Control of the space is shifting away from the EV trailblazer and toward other major automakers. And even better, I'll discuss how you can potentially take advantage of this shift right now...
Let's start with a look at the current landscape in EVs – and what to expect moving forward...
Right now, the market is still tiny...
Last year, only about 2.5 million EVs were sold overall. That accounted for just 4% of total worldwide auto sales. And in total, the world has roughly 10 million EVs today.
But consumers are getting increasingly comfortable with EVs. And the EV options are drastically improving... Even pickup trucks are expected to go electric in the near future.
As a result, EV sales are expected to soar over the next decade...
While estimates vary about how much sales will rise, most reasonable forecasts believe EVs will represent about 25% of the global fleet by 2030. That would work out to roughly 100 million more EVs on the roads worldwide.
Longer-range forecasts believe EVs will account for roughly half of all vehicle sales by 2050. And earlier this year, research firm Wood Mackenzie projected that the world would have about 700 million EVs on the roads at that time.
In other words, even if the predictions don't end up being completely accurate, experts believe the number of EVs in the world will soar from about 10 million today to roughly 700 million in 30 years... That's a massive growth expectation.
It's clear that the EV revolution is just getting started today.
And these growth expectations are possible because the auto industry is finally getting serious...
Almost every major car company on the planet is developing an EV strategy today.
For example, General Motors CEO Mary Barra has committed to an all-electric future. The automaker plans to launch 30 new EVs – for every style and price point – by 2025. It's also building two EV models for rival Honda, which plans to switch to electric in two-thirds of its cars by 2030.
Toyota is being ambitious, too... The EV pioneer – which has sold 17 million "electrified vehicles" since it first released the Prius in 1997 – recently announced that it'll launch 15 new EV models by 2025.
Finally, in March, Volkswagen CEO Ralf Brandstätter told investors that within a decade, the company intends to command 70% of EV market share in Europe and 50% in China and North America.
It remains to be seen if Volkswagen or any of these other companies will emerge as the next face of the EV revolution. Tesla certainly won't cede market share without a fight.
In the end, I suspect we won't see a definitive winner at all.
But with global automakers set to launch more than 400 new EV models over the next five years, it's clear that Tesla's biggest advantage in the space faces an impending doom...
Tesla is now simply the first-mover in what's becoming a very crowded market...
As Michelle Krebs, a senior analyst at online car marketplace Autotrader, told CNN back in March...
Tesla was the only game in town. Now it's not. We expect that Tesla sales will increase as the market increases, but there will also be stealing of Tesla's market share.
Tesla's bloated market cap is largely a reflection of its first-mover advantage. The company blazed the all-electric trail years ago, taking risks other established automakers weren't willing to take until the EV market matured.
In the process, Tesla gained substantial market share... Last year, for instance, the company sold almost one out of every four EV cars worldwide.
Tesla investors are betting that the company's first-mover advantage (and a huge investment in 25,000 fast-charging stations) will help it remain dominant as the global market grows from 10 million EVs to 700 million EVs in the coming decades.
But that's not a bet you should make. Here's why...
In short, the first-mover advantage isn't all that it's cracked up to be...
Fernando F. Suarez and Gianvito Lanzolla published an excellent article on this topic in the April 2005 Harvard Business Review.
"The Half-Truth of First-Mover Advantage" included an analysis of 30 case studies spanning a century... And it's as relevant today as it was when they wrote it 16 years ago.
The revealing conclusion of the crucial "half-truth" is this...
The advantages that first entrants to markets – like Tesla with EVs – initially gain are real. But the degree to which these first-movers ultimately succeed over the long run depends on two important factors that are often beyond their control...
- The pace of technology evolution, and
- How quickly the market develops.
The key point that Suarez and Lanzolla made is this...
First-mover advantages are most vulnerable when both technological innovation and consumer acceptance are advancing rapidly. It's just too hard for an early entrant to a particular market to maintain its dominance under these conditions.
And of course, the EV market fits both of these criteria... EV technology has improved dramatically from the early days – and it's only getting better. And as you've seen throughout today's Digest, the market is developing rapidly with all sorts of competition.
That places Tesla's big, early advantage in jeopardy...
When it comes down to it, buyers will always want a better deal...
From this point on, Tesla must contend with strong competition at lower price points.
For instance, the lowest-priced Tesla is its Model 3, which starts at about $41,000 today. But other automakers now sell EVs for less than $35,000, including the Mini Electric, Chevrolet Bolt, and Nissan Leaf.
And automakers are now releasing all-electric versions of iconic cars at affordable prices, too. Take the Ford Mustang, for example...
The sports car has been consistently popular since it was first introduced in 1964.
And earlier this year, Ford released an updated, all-electric take on the Mustang – called the "Mach-E." While it's actually a crossover SUV, buyers are already eating up the electric transformation...
Investment bank Morgan Stanley estimates that Tesla's U.S. market share dropped 12% year over year in February... And it was due almost entirely to the release of Ford's Mach-E.
More concerning for Tesla is that Ford said 70% of Mach-E buyers are new to the brand. So essentially, they're consumers who chose the Mach-E – at a starting price of about $43,000 – over comparably priced substitutes like Tesla's Model 3.
The Model 3 still offers the leading driving range – the distance between charges – of 353 miles at this price point, according to Cars.com. But the Mach-E isn't very far behind at 305 miles.
This is a big reason why it's proving to be a formidable Tesla competitor.
Remember what I noted earlier... First-movers are vulnerable when technology is advancing rapidly.
Tesla is already losing its driving-range advantage to Ford because of technology. And it's no longer No. 1 in driving range at the high end of the passenger-car market, either...
Lucid Motors, which is best known as a battery supplier for the all-electric Formula E racing series, now makes premium EVs. Its upscale Lucid Air passenger car has an estimated driving range of 517 miles... That beats Tesla's Model S (roughly 390 miles) by more than 100 miles.
In short, Tesla investors are ignoring an important "half-truth" – that EV innovation and market acceptance are advancing rapidly and remain beyond the automaker's control. Together, they're attracting fierce new competition that is quickly diluting Tesla's first-mover advantage.
In the end, the crowd will be too much for Tesla to handle...
According to Suarez and Lanzolla, it's possible for first-movers to gain durable advantages even when both technology and markets are moving rapidly. But they must have "mighty resources, far superior to those of [its] competitors."
Tesla might own a "far superior" resource advantage over younger EV entrants like Lucid. But that certainly isn't the case with the well-established automakers...
The industry giants collectively have hundreds of years of car design, manufacturing, and marketing expertise. While they haven't been making EVs over that long history, they've certainly been fine-tuning everything else... And once they figure out the technology aspect of EVs, they'll be much further along in the process than the younger upstarts.
Yet, with Tesla's market cap far outpacing most major automakers combined, investors are acting as if this experience means nothing for the massive EV opportunity that lies ahead.
That's a mistake... according to research from Vicki TenHaken. The college professor dedicated 10 years to studying the practices of corporations that have existed for at least a century and compiled the results in a 2016 book, Lessons From Century Club Companies.
Companies that have been around as long as many major automakers know how to survive market disruptions... and then thrive in their aftermath. TenHaken attributes much of this survive-and-thrive nature to one thing – strong relationships. As she notes in her book...
Relationships are at the core of how old companies operate. They regard the maintenance of relationships with employees, customers, suppliers, and others in their community from generation to generation as the foundation for their long-term success.
Now, this relationship-building practice is emerging in the EV age in the form of alliances among the major automakers...
Earlier, I noted that Honda is relying on rival General Motors to build its first two EVs. Ford aligned with Volkswagen to build Ford's first mass-produced compact EV in Europe. And Ford will design and build midsize electric pickup trucks for itself and for Volkswagen.
The reason for these alliances is simple... economics.
Bringing more production onto a common platform spreads high fixed costs like energy and labor across more units, lowering the overall cost per vehicle. Volkswagen's EV platform takes things a step further... It also reduces complexity by sharing the maximum number of components and assembly processes across as many different types of vehicles as possible – including compact cars, SUVs, and even buses.
As EV production begins to ramp up in the years ahead, alliances among the major automakers will lead to manufacturing efficiencies that rival those of Tesla.
In the end, Tesla shareholders can look back on the company's tremendous run during the early days of EVs. But now, the major automakers are positioned well for EVs, too...
With bold electrification strategies, they're laying the groundwork for massive EV production – and collectively mounting a powerful counterpunch to Tesla's first-mover advantage. While Tesla will remain an EV force, its early edge will likely erode in a big way in the coming years.
You might think that all of this makes the major automakers the best way to play the EV revolution going forward. But with more than 400 new EVs set to launch over the next five years, we can't be sure who the future winner (or winners) will be.
Fortunately, my colleague Dan Ferris and I recently found two great ways to 'ride the EV wave'...
Specifically, we've identified two little-known companies that are providing key components and equipment to multiple automakers across the EV space.
Back in May, Dan and I introduced subscribers to a supplier with a long history of excellence. It was founded 125 years ago. And like other "century club" members, strong relationships are key to its longevity...
Since at least 2016, for instance, both Honda and Toyota have been major customers. Other key automotive customers of this company include Stellantis (STLA), Ford, General Motors, Nissan (NSANY), and Volkswagen.
Dan and I really like that most of this company's light-vehicle parts are "technology agnostic." In other words, its parts can be designed into virtually any car or light truck, regardless of whether they use traditional internal-combustion engines or if they're pure EVs, hybrids, or hydrogen-fueled models.
This design flexibility will become increasingly valuable to the company's customers – the automakers – as their production runs contain a greater mix of conventional and alternative models in the years ahead.
There's something else we like about this company, too... One of its largest customers (which isn't an automaker, by the way) just doubled its 2021 sales-growth forecast. The last time this occurred, it translated into two years of accelerating sales growth for our recommendation.
Of course, that type of performance isn't guaranteed to happen again. But so far, a similar post-pandemic bounce in several sectors appears to be strong... The ongoing recovery tells us that this customer's upgraded growth outlook isn't an anomaly.
Then, in the June issue of Extreme Value, which was just published last Friday...
Dan and I alerted subscribers to a second company with excellent exposure to EVs.
This company got in the door early with Tesla, creating critical solutions for its production of motors, steering columns, and other applications. Now, the company is leveraging this expertise to capture additional opportunities...
During the first-quarter call with analysts in May, the CEO noted that the business is receiving "robust" orders from other EV makers. And on the third-quarter-2020 call back in November, he highlighted EV orders from a "large domestic automotive manufacturer" and the company's first order from an EV truck startup. Later this year, the company will also launch a marketing campaign targeted at 300 EV contacts to increase awareness.
The point is... Dan and I are bullish on these two companies as EVs become more mainstream in the coming months and years. They're great ways to profit from this shift.
Unfortunately, in fairness to all of our loyal Extreme Value subscribers, I can't just give away the names of these companies to everyone reading the Digest today. But I've worked with our marketing folks to put together a special offer if you want to learn more...
Right now, you can claim instant access to Extreme Value at our lowest-price discount ever. Get started right here.
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It's a quiet day in the mailbag today. What's on your mind? As always, you can send your comments to us at feedback@stansberryresearch.com. Remember, we can't provide individual investment advice... But we do read every note that we receive.
Good investing,
Mike Barrett
Orlando, Florida
June 15, 2021