Stockholm (HedgeNordic) – For over twenty years, Finnish stock picker Ernst Grönblom has been running a high-conviction strategy aimed at finding the superstar companies of tomorrow, having made successful early investments in Amazon, PayPal, and Facebook. Henri Blomster, Grönblom’s co-portfolio manager running concentrated equity fund Asilo Argo, has his own favourite superstar company of the future, electric car manufacturer Tesla. However, Blomster’s interest in Tesla extends beyond its car-making business.
“Long-term stock market returns are driven by a surprisingly small number of extraordinary companies,” with Ernst Grönblom (pictured left) and Henri Blomster (pictured right) working shoulder-to-shoulder to identify these superstar companies. “In layman’s terms, we aim to identify the next Amazon or next Netflix,” Blomster tells HedgeNordic. Despite already having one of the world’s largest market capitalizations at $675 billion, Blomster believes that Tesla’s potential to become a superstar in the future is still underestimated. “My current favourite is Tesla. The reason I like it is that strength of the company is misunderstood by many investors,” says Blomster.
“My current favourite is Tesla. The reason I like it is that strength of the company is misunderstood by many investors.”
Blomster’s Stock Pitch for Tesla
Tesla aligns well with Asilo Argo’s philosophy of pursuing a high-conviction strategy to find tomorrow’s superstar companies. “First, we have an exceptional entrepreneur with a strong track record,” starts Blomster. “Musk is controversial, but great leaders tend to be controversial.” Blomster and his Asilo team also encountered several “slow-traveling ideas” when analyzing Tesla.
“Tesla’s technology was about the superior performance of the car, now it is about manufacturing, about becoming the low-cost provider.”
A concept proposed by Jack Traynor, slow-traveling ideas refer to ideas or trends that take time to gain widespread acceptance and recognition. Previously, the slow travelling idea was about understanding that electric vehicles represent a novel technology, not a continuum of the technology around existing combustion cars. Currently, the slow-traveling idea centers around manufacturing. “Tesla’s technology was about the superior performance of the car, now it is about manufacturing, about becoming the low-cost provider,” argues Blomster. Although Tesla is already a low-cost provider, there is room to become even more cost-effective. “In terms of car price, we believe there will be interesting thresholds to be seen. One of them being the shift from ‘electric vehicles cost more’ to ‘combustion vehicles cost more,’” says Blomster.
Elon Musk has previously mentioned that the affordability of Tesla cars is a limiting factor. He found that even small price changes can have a big impact on demand, a concept known as price elasticity. Tesla is developing a next generation commercial electric vehicle that is expected to cost considerably less to manufacture. “The planned price reduction of the next generation vehicle hits the price elasticity curve at a perfect spot,” argues Blomster.
Tesla’s Real Options
While Tesla’s electric car manufacturing business holds great potential, Blomster sees more value-creation drivers under the hood. “A key driver for superstar companies’ share price appreciation is innovation into new areas,” emphasizes Blomster. “Imagine Netflix without streaming, Amazon without AWS, or Apple without iPhone and you get my point,” he continues. “The reason for stellar stock performance is that it is difficult to put a price on something that currently does not exist. Tesla gets top talent and has several, what we call real options, i.e. projects outside the current auto business.”
“A key driver for superstar companies’ share price appreciation is innovation into new areas.”
For instance, Tesla’s Megapack is an energy storage solution for commercial, industrial, utility and energy generation customers. Tesla has also introduced an insurance product using real-time driving behavior in selected states in the U.S., which offers rates that are often better than other alternatives. Tesla has also started production of its Dojo supercomputer to train its fleet of autonomous vehicles, as well as plans to establish an autonomous Tesla ride-hailing network, and is developing Optimus, a conceptual robotic humanoid. “Let it be Megapacks, insurance, Dojo, data centers, robotaxis or Optimus, we believe that something will succeed,” says Blomster.
The macroeconomic landscape suggests that 2023 will be a difficult year for electric car manufacturers, as economic uncertainty prompts many consumers to postpone vehicle purchases. “The macro headwind will fade eventually, and when it does, Tesla will be in a strong position,” believes Blomster. In the short run, various developments could influence Tesla’s share price performance. “We will see how the upcoming cybertruck deliveries affect the brand and scaling of the Megapacks. In addition, there are certain long-term developments that, if successful, will have a substantial impact on the share price, such as solving Full Self-Driving (“FSD”) to robotaxi level or licensing FSD software to other car manufacturers,” Blomster notes.
“The macro headwind will fade eventually, and when it does, Tesla will be in a strong position.”
Blomster believes Tesla is a particularly hard stock to sell for two reasons. “First, cars are a cyclical commodity. Second, Tesla tends to deliver in the end but at a later stage than initially anticipated,” says Blomster. However, he cautiously monitors competition from China, indicating that “losing to this competition would be a sell signal for us.”