FEATURE Tesla’s undoubted progress still unlikely to change the minds of fans or sceptics

FEATURE

Tesla’s undoubted progress still unlikely to change the minds of fans or sceptics

Electric carmaker remains a marmite stock to most – you either love it or hate it

Elon Musk has a lot on his plate these days. What with tangling with Twitter (TWTR:NYSE) over spambots, sending Starlink satellites into space and crusading on free speech. Yet the industrious entrepreneur’s primary passion project remains Tesla (TSLA:NASDAQ), and building it into the world’s most important carmaker.

Millions of investors have been lured into the Tesla growth story by the billionaire’s sheer chutzpah, and they have largely been rewarded for their loyalty, with the share price having grown 10-fold in five years. Yet, like so many other growth companies, the stock has struggled this year as investors weigh the various impacts of soaring inflation, clogged supply chains, war in Ukraine and slowly economies worldwide.

Tesla vehicle deliveries (thousands)

2022 Q2 2022 Q1 2021 Q4 2021 Q3 2021 Q2 2021 Q1 2020 Q4 2020 Q3 2020 Q2 2020 Q1 2019 Q4 2019 Q3 2019 Q2 2019 Q1 254.7 310.05 308.6 241.3 201.25 184.8 180.6 139.3 90.7 88.4 112 97 95.2 63

Chart: Shares magazine • Source: Tesla, Statista The shares have lost 33% in 2022 to date.

So where do investors stand now, in the wake of last week’s (20 July) second quarter earnings? As usual, there’s lots to unpack, not least the sideshow that came after Tesla said it had sold $936 million worth of bitcoin, about 75% of its holding in the cryptocurrency, to shore up liquidity concerns.

What the conference call did show is that Musk remains as finely attuned to Tesla’s travails as ever. He dived deep into manufacturing minutiae, supply chain snarl-ups, and vehicle demand, shying away from pontificating about semi-distant technologies (AI-powered robots, robotaxis et al) as he has done in the past.

Sticking to the script is not something investors have come to expect from Musk but a more prosaic presentation was no bad thing. Despite numerous hurdles that have included Covid shutdowns at its Shanghai plant, global economic uncertainty and the constant hoopla that surrounds Musk, the world’s most valuable car company reported another solid quarter.

SECOND QUARTER FORECASTS BEATEN

Tesla topped second-quarter revenue and earnings estimates with $2.27 EPS (earnings per share) versus a $1.81 forecast, on revenue of $16.93 billion, more than $180 million more than Wall Street expected. Vehicle deliveries

did fall compared to the prior quarter (about 254,700, down from 310,000), as did automotive gross margins, from 32.9% in Q1 to 27.9% in Q2, although that too beat analyst predictions, according to data collator ConsensusGuru.

That said, automotive gross margins were 28.4% in Q2 2021, and Tesla faces substantial production ramping costs at its Berlin and Shanghai factories, recently called ‘gigantic money furnaces,’ by Musk, which will likely drag on profit margins for the rest of the year.

The latest three-month period was a unique quarter for Tesla due to a prolonged shutdown of its Shanghai factory, Musk said but despite these challenges, it was one of the strongest quarters in Tesla’s relatively short history. Company officials said their pre-Shanghai shutdown goal of increasing vehicle output by 50% remains within reach, even after lockdowns in May slowed production.

If anything, Tesla could benefit from more manufacturing capacity. Company executives swatted away questions about an inflation-driven decline in demand for Tesla vehicles, with Musk bluntly declaring that: ‘Tesla does not have a demand problem. We have a production problem.’

Tesla Q2 versus forecasts

Percentage difference between reported number and consensus forecast

Revenue Adjusted EPS Free Cash Flow

1% 25% −1%

Chart: Shares magazine • Source: Tesla, ConsensusGuru

PRESSURE ON TO DELIVER THE DREAM

Eventually however, Musk will need to back up some of the grandiose talk and promises for Tesla’s next generation of ground-breaking products. Musk said Wednesday that he hopes to start delivering Tesla’s long-awaited Cybertruck in mid2023 having announced the vehicle in 2019, and he boasted that the company will ‘solve’ self-driving technology gremlins this year.

But previous proclamations on both fronts haven’t materialised, and rival automakers are closing in on Tesla’s EV lead, with Chinese bid data company Baidu (BIDU:NASDAQ) now venturing into the EV space by unveiling an all-electric, autonomous robo-taxi that could hit cities by 2023.

Musk often makes media waves for his off-thefactory-floor antics but Tesla’s Q2 was a decent performance given unprecedented obstacles, or so investors clearly thought, judging by the 10% share price jump in response. For now, there is little in the latest figures and commentary likely to queer the pitch for Tesla stock fans, but nor was there much to convince the sceptics either.

By Steven Frazer News Editor

European private equity: the road ahead

Alan Gauld, Investment Manager, abrdn Private Equity Opportunities Trust plc

• European private equity deals reached record highs in 2021 • The trust celebrated its 20th anniversary in 2021 and changed its name to the abrdn Private Equity

Opportunities Trust • The immediate road ahead appears more challenging, but we are encouraged by the strength of the underlying companies

2021 was a strong year for European private equity. It was aided by a buoyant Initial Public Offering (IPO) market, and the technology sector in particular. However, against a more challenging backdrop, can the European private equity sector continue to make progress in 2022?

The trust celebrated its 20th anniversary in 2021 and changed its name to the abrdn Private Equity Opportunities Trust (formerly Standard Life Private Equity Trust). The trust now has over £1 billion of assets and was promoted from the FTSE UK Small Cap Index to the FTSE 250 Index in March, which has brought it within the scope of a new set of investors. It is also helpful in terms of liquidity for existing shareholders. 2021 was a good year for technology IPOs in particular. In Europe, this has been mainstream technology, such as software businesses, but also consumer businesses with a digital component, such as Moonpig or Dr Marten’s.

A shifting landscape However, we are aware that the landscape has changed since the start of the year. The IPO and Mergers & Acquisitions (M&A) markets are less buoyant as inflation, higher interest rates and weakening economic growth bite. In our 21 years of operation, we have seen a variety of cycles – navigating the global financial crisis, the pandemic, inflation and now war in Ukraine. We’re no stranger to a difficult investing climate.

We are encouraged by a number of factors. Current valuations are not ambitious and, in most cases, remain at a discount to public companies. However, far more important is the strength and quality of the underlying companies in the portfolio and the diversity of opportunity available in Europe. In terms of new investments, private equity typically thrives on opportunities that present themselves during times of market uncertainty and, over the longer term, companies are staying private for longer.

Our strategy is focused on partnering with the best private equity managers in Europe. That includes some familiar names in the listed PE space, such as Hg and 3i, but over 80% of the trust’s portfolio is with managers that investors might otherwise find it difficult to access.

In terms of the underlying companies, we strive to build a portfolio that has the right balance of defensive qualities and growth elements. For example, the tech companies that the trust typically invests in are business-to-business companies, whose products are non-discretionary and often mission critical to their customers, with the potential to generate high levels of recurring revenues. A good example is Visma, an ERP cloud software business that runs business critical processes, such as payroll, to over a million small and medium-sized enterprise (SME) customers.

The trust does have some business to consumer companies with certain characteristics that gives them a loyal customer following and therefore repeat sales. These are companies such as Action, a discount retailer with a differentiated offering that attracts repeat customer footfall. Originally based solely in the Netherlands, it has successfully grown its presence across continental Europe via new store openings.

In terms of notable recent deployment, the trust invested in NAMSA, a contract research company, that works alongside medical device manufacturers to test their new products for them. Hence, it is a very important partner to large medical device companies when developing new products. We also invested in European Camping Group, an operator of camp sites across Europe, including Italy, France, Spain and Croatia, which is well placed to benefit from an increase in lower-cost holidays and the expected uptick in post-pandemic travel.

Europe: a breadth of opportunity As it stands, 80% of the trust’s portfolio is in Europe, which is different from many of the other listed private equity trusts which are more weighted to North America. Europe is a heterogenous market, which makes local access very important. It can be a tougher market to crack given the different languages and cultures, different skills and different technical aspects (e.g. regulation, legislation) for each region.

The trust is also focused on the midmarket – companies that are £100m to £1bn in size. Private equity has become focused on larger companies

as more money has flowed into the sector. However, to our mind, this is not necessarily where the best opportunities lie. The mid-market has a rich supply of businesses where private equity firms can add significant value through organic initiatives, such as digitisation and ESG, or through M&A. Typically this size of business is less reliant on IPO as an exit route, compared to businesses >£1bn in size.

In 2019, we started the trust’s coinvestment programme, making direct investments in private equity opportunities alongside other groups. For each of these businesses, we are partnering with managers over a long period of time: the investment trust structure gives us that long-term, committed capital. These opportunities allow us to target specific sectors where we see long-term structural growth. It gives us greater control over how we construct the portfolio.

At the moment, we continue to favour the healthcare and technology sectors. Our longer-term target is to raise these sectors to 50% of the portfolio (from a current level of just over 40%). In technology, for example, the transition to the cloud is a potential source of growth and we generally favour proven, Business-to-Business (B2B) software businesses that are cash generative. Healthcare is naturally resilient, and also has a number of fastgrowing niches. That said, the remainder of the trust’s portfolio will be well balanced across Consumer, Industrials and Financials, and we have made several investments that are well placed to benefit in a post-pandemic world, the aforementioned European Camping Group being a good example.

Ultimately, this year may be a tougher year, but we believe our portfolio holdings are well-placed to navigate a variety of economic conditions. European private equity markets offer a vast range of opportunities and private equity can often benefit on new investments made during periods of greater market uncertainty. At abrdn, we have the analytical resources and global reach to harness those opportunities wherever they emerge.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important Information Risk factors you should consider prior to investing: • The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested. • Past performance is not a guide to future results. • Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years. • The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV. • The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the

Company’s shares. • The Company may charge expenses to capital which may erode the capital value of the investment. • The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies. • Movements in exchange rates will impact on both the level of income received and the capital value of your investment. • There is no guarantee that the market price of the

Company’s shares will fully reflect their underlying Net

Asset Value. • As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen. • The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down. • Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts. • Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information: Issued by Aberdeen Asset Managers Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Authorised and regulated by the Financial Conduct Authority in the UK. An investment trust should be considered only as part of a balanced portfolio.

Find out more at www.abrdnpeot.co.uk or by registering for updates. You can also follow us on social media: Twitter and LinkedIn.

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