Tesla (TSLA) shares are out of favor, again.
This time, it’s because the electric car/solar power/save-the-planet company is beginning to be valued like an automaker.
The transformation began last week. That’s when Elon Musk announced the $47 billion company was finally ready to mass-produce a $35,000 electric vehicle.
This was supposed to be an epic milestone in the quest to bring electric cars and new-age swagger to the masses. Instead, it spells trouble for Tesla.
This also marks the beginning of a new component ecosystem.
I own no Tesla shares. I’m not short. Since its flashy IPO nine years ago, I’ve watched the circus from the safety of the sidelines.
To be fair, Elon Musk has a rare talent. Like Steve Jobs of Apple fame, he is a master storyteller. The story he’s telling with Tesla is a humdinger.
Before Teslas, electric vehicles (EVs) were underpowered and unsafe. Driving a Toyota Prius or one of those Honda lookalikes told the world that you cared about the planet but you didn’t like driving.
An EV was an exceedingly dull tool. End of story.
The Model S changed everything …
Super-sleek, loaded with cool gadgets and insanely quick, Teslas made no compromises. Like eating ice cream all day and getting six-pack abs for your trouble. Tesla owners love driving their cars, and they felt like they were saving the planet, too.
So when Musk laid out a plan to eventually build an EV everyone could afford, buyers flocked. During a two-week span in 2016, Tesla sold 400,000 Model 3s online. No test drives needed or even wanted.
Bearish investors having been saying for years that this would all end badly …
Jim Chanos, a noted short-seller, told a Bloomberg panel in 2015 that BMW’s i3 was a Tesla killer. He recommended shorting the stock ahead of the inevitable reckoning.
And Bob Lutz, the former chairman of General Motors (GM), called Tesla a Ponzi scheme during a 2017 CNBC TV interview.
For the record, with its measly 42.2 kWh battery, the i3 was a disaster for BMW. And Tesla is not a Ponzi scheme. It’s an 11-year-old business that builds new factories and manufacturing processes.
However, Chanos’ and Lutz’ larger points hit home. At some point, Tesla had to graduate from its too-good-to-be true bubble.
The $35,000 Model 3 is the pinprick.
This forces investors to acknowledge Tesla’s shortcomings. The company has always struggled to make cars at scale. Now, real competition is headed its way from companies that know how to mass-produce vehicles.
Related post: BMW gives the electric vehicle market a charge
And across the industry, the pipeline is full of would-be Tesla assassins from the likes of Audi, Mercedes, Porsche, Aston Martin and this beauty from Ferrari.
Every major carmaker has plans for EVs …
- Volkswagen, the largest carmaker by sales, is spending $12.5 billion getting its plants ready to produce 15 million electric cars by 2023.
- Volvo is electrifying the entire fleet.
- Ford (F) announced in January the company would produce an all-electric F-150
While this is not great news for Tesla, this sea change is an opportunity for investors.
It means carmakers are rethinking their systems and processes. Which, in turn, creates a new category of components winners — I’m talking about companies with strong competitive advantages and plenty of profit runway.
Amphenol Corp. (APH) is a perfect example of this new kind of opportunity.
Connecticut-based Amphenol makes electrical wiring interconnection systems, sensors, antennas, infotainment, light assemblies, switches and power management products for the automotive sector.
In Q4, Amphenol completed its acquisition of SSI Controls Technologies. This Wisconsin company provides high-tech sensor systems, including ultrasonic level systems, to the automotive and industrial sectors.
Admittedly, SSI has a dull business. That’s just fine because it’s surprisingly lucrative. And it’s destined to improve as more electric cars use its sensors and interconnection systems.
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Amphenol has become a leading player in the automotive, military, commercial aerospace, mobile, broadband and data communications markets it serves.
Fourth-quarter sales reached a record $2.26 billion, rising 14% quarter-over-quarter. New bookings surged to $2.2 billion, and free cash flow was $378 million.
For the full year, sales jumped 17% to $8.2 billion.
Amphenol shares, recently at $94.32, trade at about 24x forward earnings, and 3.6x sales. The market capitalization is $28.2 billion, following a 16.6% rally so far in 2019.
Given the bright prospects, investors can safely buy Amphenol shares into market weakness.
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Jon D. Markman