How To Profit From Global Warming Part 1: Tesla

This year has been an inconvenient one for climate change deniers. Those who refuse to believe that the world is getting warmer struggle to make their case when the media constantly reports record high temperatures, forest fires and floods, reinforced by interviews with broiling tourists and worried climate scientists.

Global warming does present investment opportunities, however. Pessimists can buy shares of companies that make products such as ice cubes, air conditioners, water bombers for fighting forest fires and boats for rescuing flood victims. Optimists can buy into companies that make products such as electric vehicles (EV).

The market for electric vehicles is growing steadily, figures from the International Energy Agency (IEA) show. EV sales exceeded 10 million in 2022, representing 14% of all new cars sold last year, up from about nine per cent in 2021 and less than five per cent in 2020. The market continued to expand this year, as 2.3 million electric cars were sold in the first quarter, about 25% more than in the same period last year. For 2023, the agency said it expects to see EV sales increase by 35% year-over-year, with new purchases accelerating in the second half of this year to account for 18% of total car sales.

Tesla Inc.

For investors, shares of Tesla Inc. have been the obvious way to play the electric vehicle market. The stock (TSLA/NASDAQ) trades at more than US$250, but Canadians can buy fractional shares of Tesla and other giant U.S. corporations through Canadian depositary receipts (CDRs). In July 2021, CIBC issued an initial batch of 18 Canadian-dollar hedged CDRs at C$20 each to track the largest U.S. companies. The list has since expanded to 41 names, including Tesla (TSLA/NEO), whose CDR trades in the C$25 range.

Regardless of where they traded, Tesla shares plunged in 2022 but began a rebound at the start of 2023 and have since increased by about 130%. The company now has a market capitalization of US$835 billion, making it by far the largest automaker and bigger than most of its competitors combined. Ranked by revenue, however, Tesla falls to eleventh place among automakers, showing that investors are much more optimistic about Tesla's prospects than that of any of its competitors.

Tesla's shares trade at about 70 times trailing 12-month earnings, far higher than other carmakers such as Toyota (11.1 times) and Honda (10.2 times), while automakers such as Volvo, Mazda, Mercedes-Benz, General Motors, BMW, Volkswagen and Hyundai trade at less than ten times trailing earnings, says the Companiesmarketcap.com site.

Tesla's production, vehicle sales and revenue have been growing. The company delivered 1.3 million vehicles last year. Its facilities in California, Nevada and Texas, along with Berlin, Germany and Shanghai, China, and a new plant under construction in Monterrey, Mexico, should allow it to turn out more than two million vehicles a year, Tesla's July 19, 2023 second-quarter update says. By 2030, the company hopes to be producing 20 million vehicles a year, roughly twice what Toyota made in 2022.

Hampered by economic headwinds that decreased consumer demand, together with a lack of new models, Tesla has cut its vehicle prices several times this year. Tesla's share of the automotive market has grown to four per cent in the U.S. and Canada, 2.75% in Europe and 2.25% in China, the company's second-quarter update says. In the second quarter, Tesla's total production of 479,700 vehicles was up 86% over the same quarter a year ago, while deliveries jumped 83% to 466,140. Tesla's network of EV charging stations grew by a third.

Tesla's total revenue jumped to US$25 billion in the second quarter of 2023, up by 46% over the second quarter of 2022. The price cuts have helped its sales volume at the expense of earnings. The company's gross and operating profit margins slipped slightly, but income climbed 20% over the second quarter of 2022. Tesla generated a net income of US$2.7 billion or US78 cents per share in the quarter.

Tesla's balance sheet is strong, with total assets of US$90.6 billion against total liabilities of US$38.4 billion. Total debt, excluding vehicle and energy product financing, was just US$44 million.

Investors considering buying shares in Tesla should watch the company's investor presentation (https://www.youtube.com/watch?v=Hl1zEzVUV7w&t=1004s). The three-hour-and-45-minute seminar was streamed live from Tesla's Austin, Texas, gigafactory on March 1 and features CEO Elon Musk and his team of senior engineers and is available on YouTube. Unlike most investor presentations, this one goes beyond trying to convince attendees to buy Tesla shares, as making electric cars turns out to be only a small part of Elon Musk's master plan.

The master plan detailed in Tesla's presentation describes what Musk says is a clear and easily achievable path to 100% sustainability by 2050, when all forms of transportation except rockets will be electric. First, the electricity grid itself will be powered by renewable energy sources. Second, all vehicles will be both electric and fully autonomous, with Tesla turning out 20 million of them a year. Third, all buildings—homes, businesses, and industries—will be heated and cooled with heat pumps. Fourth, all foundries and other heavy industries that typically use coal will be electrified. Finally, redesigned planes and ships will be powered sustainably, with battery-powered ships achievable more easily than aircraft.

The ambitious goals would be laughable if they weren't delivered by Musk, whose track record and wealth add credibility. Although born in South Africa, Musk moved to Saskatchewan in 1989 when he was 18 and became a Canadian citizen by way of his mother, Maye, a model and dietician who was born in Regina. In 1990, Musk attended Queen's University in Kingston, Ontario.

Most analysts have a "hold" rating on Tesla's shares, with average 12-month share price targets that are similar to the company's current price. Polls by CNN, the Nasdaq and WSJ markets note that analysts' price targets for Tesla range anywhere from US$85 to US$350.

Shift In The EV Charging Market

Electric vehicles are best recharged via home charging stations, which is problematic for EV owners who live in condominiums or apartments. Those without home charging stations must rely on public chargers.

I bought a 2023 Chevrolet Bolt EUV last October and am so pleased with it that I will never go back to gasoline. Until I had a home charging station installed, however, I relied on public EV chargers, which were slow when they worked and useless when they didn't, which was often. Lineups were another headache, as even the fastest functioning public chargers took an hour to recharge, requiring me to take along a good book or magazine in case the charger was already in use.

Electric vehicle chargers come in three levels. Level 1, the slowest, uses a regular household 120-volt AC outlet to deliver about 7-9 km of range per hour, depending on the vehicle. These chargers are best suited for hybrid vehicles and for those who don't do a lot of driving. A level 2 240-volt AC charger (which an electrician installed at our home) adds 200 km of range in about five hours. Level 3, or 480-volt DC fast charging stations, can recharge a vehicle in under an hour. These are usually found at commercial locations near highways and rarely found in home installations because of their high cost.

Drivers of non-Tesla EVs have had "road trip anxiety" when we had to map out which chargers would be available to us when we travelled far from home. Tesla's red-and-white superchargers look lovely, but their plugs only fit Tesla vehicles. The situation began to resolve itself this spring when Tesla signed deals with other automakers.

On 25 May 2023, Ford announced that starting early next year, owners of its Mustang Mach E cars, F-150 Lightning pickup and E-Transit vans will be able to use an adapter to charge their vehicles at Tesla superchargers. In 2025, Ford's EVs will have the connector built in, precluding the need for an adapter. A few weeks later, General Motors made a similar announcement, with EV maker Rivian and Mercedes-Benz following suit.

The moves by other companies suggest Tesla's chargers may become the industry standard.

If all-electric vehicles can be charged at Tesla stations, its network will become a huge revenue and profit generator and competing charging networks will struggle to maintain market share. Certainly, there is room for improvement in the public charging industry, as no charging companies are profitable, and aside from ChargePoint Holdings Inc. (CHPT/NYSE), all are tiny and have so far been horrible investments.

Conclusion

Tesla is the dominant player in the electric vehicle market, which is growing and should continue to expand. The recent moves by competitors to eventually modify their vehicles to accommodate Tesla charging plugs are a win for Tesla in two big ways. It should ease motorists' anxiety about running out of power on long trips, removing a major roadblock to EV purchases and may be a major revenue generator for the company. Tesla's shares are more volatile and clearly trade at much more optimistic levels than other automakers, but in my opinion, Elon Musk's track record justifies making Tesla suitable as part of a diversified portfolio.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca