Investors are missing the point by focusing on Tesla (TSLA) founder Elon Musk’s controversial tweets, instead of the huge opportunity in front of electric car maker, according to Baillie Gifford’s Iain McCombie.
Musk has come under fire after a series of questionable tweets that included a claim he had secured funding to take the company private, for which he received a $20 million fine from the Securities and Exchange Commission.
He later said the fine was “worth it” before claiming a US Justice Department investigation into his company was “total bs”. Tesla has since had to put in new guidelines to oversee Musk’s social media use and he was stripped of his role as chairman, though he remains chief executive of the company.
McCombe, manager of the Baillie Gifford Managed fund, accepts that the tweets “are a giant distraction”. “They’re an embarrassment and I wish he wouldn’t do it,” he adds. However, he counters, the compelling story of Tesla is “partly about the genius of Musk”.
The fund manager speculated that had Twitter been around when fellow car manufacturer Henry Ford was alive, Musk’s tweets “would be pretty mild in comparison”.
“You might not like Musk, and I’m not condoning what he did, but you can’t deny the fact that he’s done some pretty remarkable things,” admits McCombe.
“And that is often what a lot of entrepreneurs are like. They’re eccentric, they’re not everyone’s cup of tea and they challenge conventional wisdom.”
Reasons to Be Positive
McCombie says he and his colleagues, who combined own enough to make Baillie Gifford Tesla’s third largest shareholder, are still excited about the stock for numerous reasons. One is the fact that volume is beginning to come through, despite short-term noise about production.
Last week’s third-quarter results, which Musk hailed as “incredibly historic” saw the firm turn a surprise profit and report better-than-expected car sales and a faster timeline on its Model 3 production.
In fact, says McCombie, Tesla is now selling more cars in the US than Daimler, the German owner of Mercedes-Benz. “Now, Daimler’s been in the market for 100-plus years and here’s this upstart and they’re outselling them in the US. If you’d said that a few years ago, you’d probably have been locked up, but that’s happening.”
There are lots of risks, of course, and “we could still be wrong”, McCombie makes clear. But it is the traditional car makers who are under pressure, he claims, suggesting this could be their “Kodak moment”.
“They spent hundreds of years building up their knowhow in industrial combustion engines and they do a great job with that, but what happens if all of us are suddenly saying ‘oh, I want an electric car’? Suddenly, that knowhow is useless,” he concludes.
“What happened with Kodak is they actually discovered the digital camera, but they buried it because it was too frightening for them. They thought it would kill their film business. But the fact that they didn’t innovate killed Kodak.”
That’s the dilemma the traditional car names now face. Some autos are launching newer, more up-to-date models and that they hope will eventually kill Tesla off.
“Maybe they are launching electric vehicles, but the bulk of their sales are still coming from legacy products,” says McCombie.
“They’ve built wonderful businesses for themselves, but what happens when the business is changing? That’s why your Tesla is exciting, because they don’t have those legacy issues.
“We don’t think it’s all about Tesla owning the market – we expect other people to come into the market. But what we’re thinking is the market will expand dramatically.”
Tesla shares were languishing at an 18-month low of $250 at the beginning of this month, but have rallied since, helped by the Q3 numbers. They are up 35% since 8 October and currently change hands for $338.
The company is owned by a number of high profile Baillie Gifford investment trusts, including Scottish Mortgage (SMT) and Monks (MNKS), which are rated Gold and Bronze respectively by Morningstar fund analysts.
