Is Tesla’s green investment bubble about to burst?

Tesla’s nosebleed-inducing rise in share price shows no sign of slowing down. From lows of $185 last May, the company’s shares reached new highs of $1,643 this week ahead of its crucial second-quarter earnings on Wednesday.

Long doubted and dismissed, it has now posted three consecutive quarters of profit, including one that took it through a global pandemic. It is worth $250bn, the most valuable car company in the world, and it attracts devoted fans like no-one else. 

Its success is often pinned on charismatic chief executive Elon Musk, and the company’s early adoption of the electric vehicle technology that is becoming increasingly mainstream amid widespread incentives pushing carmakers away from gasoline. 

Tesla also occupies a unique position in the market. It’s a green company, but also a manufacturing company and a technology company. This means it attracts investment from all three sectors, and can capitalise on a resurgent interest in “green” stocks. 

Interest in funds and shares driven by ESG (environmental, social, governance) priorities is growing. Data from financial services firm Morningstar showed that the first quarter of this year was a record one for sustainable funds.

Does Tesla’s unique position leave it vulnerable as the market it now dominates becomes increasingly competitive? Many legacy automotive companies have electric cars coming out this year or next, and a host of startups are snapping at its heels. 

Dan Ives, of Wedbush Securities, thinks the stock has further to climb. The most optimistic prediction from his firm has the company at a $2,000 target. “It’s a supply and demand issue. Tesla continues to be the main game in town when investing in a green way,” he says. 

“Over the coming 12 to 18 months, there’s going to be more companies that play into the space. I think for Tesla it’s an opportunity and also a challenge at the same time. 

“They’re miles ahead of the competition, but they have a target on their back in terms of going after what’s going to be a trillion dollar market over the next decade.”

Confusion reigns over whether Tesla can truly be considered an ethical stock. It is pushing the world towards electrification, but some ratings agencies score it less well on its transparency, governance and HR policies. 

The company began releasing impact reports in 2018, but some analysts still think it could be more upfront about its resource efficiency and waste generation. 

In Germany, it has faced protests over plans to build its new “gigafactory” in a forest near Berlin.

At Ark Invest, one of Tesla’s biggest supporters, the company makes up 10pc of its fund. Its rationale is pragmatic and based on its belief in battery technology and conviction that building electric cars is more capital efficient than building gasoline-powered vehicles.

Tesla is also benefiting from a wider revolution in investment trends. 

Passively-managed funds, which pick a basket of stocks based on a certain criteria and then hold them for investors, have exploded in popularity as high fees and inconsistent results mean funds managed by a professional stock-picker have lost their shine. 

Emma Wall, head of investment analysis at Hargreaves Lansdown, says: “We have seen an increase in passive investing over the past six months, particularly as the market fell, and it being a large stock means that it will occupy a large position in a number of indices. 

“If you are buying a passive fund which tracks a number of different things – a broad US passive fund, a tech passive fund, an ESG passive fund, and various iterations of the three – you are likely buying Tesla. Flows into passive funds will push up Tesla’s price.”

It doesn’t take a sceptic to blanche at the heights the Tesla valuation has reached in recent weeks. The speed and scale of the climb has raised fears of a bubble, especially as younger, inexperienced investors bought the shares at their highest heights. 

“It would be very easy to say ‘don’t invest in the stuff that’s done well,’ but it’s a trade that has played out extremely well for a number of investors. 

“If you’d just bought the broader US market five years ago, a lot of people would have said that those valuations look stretched, and yet it has continued to rally even considering the volatility of the last six months,” says Wall. 

Wall says this is part of a broader trend of already-huge technology stocks like Facebook, Google and Apple gaining even more as people pile into passive investing. 

But these three companies are true technology firms, and do not face the same headwinds that Tesla does in the notoriously narrow-margin car manufacturing industry. 

Even Apple, which made its billions in consumer hardware, is trying to pivot to software to preserve its profit margins. 

“Elon Musk started an electric car company at the perfect time to start an electric car company, and I think a lot of the market participants who were banking on a Tesla bankruptcy failed to understand that,” energy analyst Gregor Macdonald told mobility podcast CoMotion this week. But, he said, the $250bn valuation is too high.

“If Tesla were a software company I might feel a little warmer toward that market cap.”

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