Forget Tesla — This Is the Best Stock for the EV Revolution

Living here in the greater D.C. area — where top-end incomes tend to be higher — you can’t throw a rock without hitting a Tesla.

They’re everywhere.

And naturally, so are insufferable Tesla fanboys.

In general, I like the cars and the innovative direction of the company, but for some, Tesla Inc. (Nasdaq: TSLA) has become a religion.

And when people believe something, it’s much harder to change their minds. In fact, they’re often hostile to any criticism.

Even valid ones like, “Tesla doesn’t actually produce very many cars.”

Source: Bloomberg, Seawolf Research

“And because of that low production rate, they really don’t bring in much revenue.”

Source: Bloomberg, Seawolf Research

Invariably, the fanboy answer to these legitimate criticisms is, “but Tesla isn’t a car company, they’re a tech company.”

That narrative makes me want to scream… but OK, fine.

If it’s a tech company, though, should it be worth more at this stage in their development than Alibaba Group Holding Ltd. (NYSE: BABA) — the largest e-commerce platform in the world’s largest country?

Should it be worth more than JP Morgan Chase & Co. (NYSE: JPM), the largest bank in the United States?

Should it be worth more than Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK/A)?

Source: Bloomberg

Yeah, I don’t think so either.

If it really is a tech company, of course we should expect a higher-than-normal multiple.

And of course, it’s true that earnings (and therefore the denominator in price/earnings ratio) will increase over time.

But 906x forward earnings is ridiculous considering that the nearest actual tech companies — Apple Inc. (Nasdaq: AAPL), Microsoft Corp. (Nasdaq: MSFT), Amazon.com Inc. (Nasdaq: AMZN), Alphabet Inc. (Nasdaq: GOOGL) and Facebook Inc. (Nasdaq: FB) — all trade at least a factor of 10 lower.

At least from a valuation perspective, Tesla’s remaining near-term upside is limited while downside could prove significant.

And moreover, it’s now been mired in a bearish trend for more than two months, making lower lows and lower highs over that time.

Source: Bloomberg

So, while fanboys and fangirls like Ark Investments’ Cathie Wood will continue to try and pump the stock higher in the near-term, I have zero desire to participate until I see a clear trend reversal.

Until then, there’s a better way to invest in the sector.

In fact, there are two.

Let’s Talk About Scale

The most jarring number to me in those first two tables I posted was the number of cars produced.

Simply put, while Tesla makes the most electric cars in the world, they just don’t make very many cars overall… period, stop.

And while they’re growing — 2021 production is projected to be around 600-800k vehicles — they have to build to grow.

That buildout requires two things — capital and time.

And while Tesla Technoking Elon Musk has plenty of the former, he is just as leveraged to the latter as any other newcomer.

Although Tesla’s new plant construction projects in Austin, TX and Brandenburg, Germany are being completed relatively quickly, the Technoking warned shareholders it would take somewhere between one and two years to ramp them up to full capacity.

That’s because scale requires time to achieve. You don’t just need time to finish construction, you also need to hire and train labor, to establish best practices, to develop regional marketing plans and to coordinate with dealers amongst other things.

There’s also the potential for trouble.

As Geoffrey West put it in his fantastic book Scale, “While exponential growth is a remarkable manifestation of our extraordinary accomplishments as a species, built into it are… the portent of big troubles just around the next corner.”

So, if I’m investing in this space at this particular time in the market, I’d prefer to own a company that has already built to scale rather than one who is in the process.

And if I repost that first table, it’s easy to see where that scale lies.

Source: Bloomberg, Seawolf Research

That’s right, Volkswagen AG (OTCMKTS: VWAGY) is on pace to overtake Tesla as #1 in electric vehicle sales next year as the company rolls out its new ID.4 electric vehicle.

Because of a Federal rebate that allows U.S. taxpayers to deduct $7,500 from the purchase, that pegs the final MSRP at around $32,500 per unit.

That rebate will be available until VW sells 200,000 cars in the U.S. — a figure both Tesla and General Motors Co. (NYSE: GM) have already exceeded. That should allow them to undercut Tesla on price amongst average consumers and capture market share for roughly a year.

On top of that, VW will transition to 100% EV’s by 2026 and plans to scale a product line of high-range, short-charging time cars over that time.

In addition, Volkswagen already controls their own charging service in Europe with over 150,000 public charging points — a far greater starting concentration than Tesla.

But perhaps even more importantly, their price chart looks like this:

Source: Bloomberg

That’s right — it’s doubled over the past three weeks, which is pretty different from Tesla’s bearish chart from back in the first section.

When prices move this fast, though, they don’t always take any related companies for the same ride.

Usually, that’s because of a lack of awareness on the part of generalist hedge funds or retail investors.

But if you’re, say, a longtime industry analyst willing to “look under the hood,” you can often find some interesting twists and turns that others overlook.

And what I found looking through Volkswagen’s ownership structure was a Sixth Sense-level plot twist.

I See Porsche People

So, let’s not beat around the bush… Here is Volkswagen’s corporate ownership structure.

Look who sits at the top.

Source: Bloomberg

Yes, you’re reading that right, Porsche owns 53.3% of Volkswagen.

“How can that be?” you might ask… Well, it’s complicated.

Basically, this Porsche is not the brand/manufacturer of the car line (Porsche AG) that Volkswagen owns.

Instead, it is a holding company (Porsche SE) controlled by the family of the famous engineer Ferdinand Porsche – who established the Porsche car company as a consultancy and actually designed such classic cars as the Volkswagen Beetle, the Auto Union Racing Car and the Mercedes Benz SSK.

Even more interestingly, Porsche SE acquired the bulk of their VW shares in a well-designed short squeeze slightly reminiscent of the GameStop Corp. (NYSE: GME) saga earlier this year.

I kid you not when I say this is a really interesting, deep, convoluted story that is worth investigating on your own and I encourage you to do so at your own leisure.

But I’m here to talk stocks, so let me take you through this investment thesis.

Volkswagen’s current market cap is roughly US$106 billion, of which Porsche SE owns 53.3% – or US$56.5 billion.

Yet the market cap of Porsche SE (OTCMKTS: POAHY) is only US$31.6M.

Source: Bloomberg

That means that based on its ownership of VW alone, POAHY stock is currently undervalued by 78.4%.

If Volkswagen continues to scale and capture a larger share of the global EV market, this particular stock has an easy chance at a double and could rise even more than that.

Even better, it went on sale today and may slide a bit further if the sector falters.

Picking up a ¼ tranche now and buying in smaller increments on down days like today seems like a good way to make some long-term profits.

Fahrvergnügen!

All the best,

Matt Warder