Last year, Tesla was riding high as a member of the Magnificent Seven Big Tech stocks that fueled stock market gains throughout the year. This year, the pioneering electric carmaker’s stock price has tumbled 27.6% in the wake of weaker demand for electric vehicles (EVs), making it the weakest performer among the Magnificent Seven.
Tesla stock has recovered from the lows it tested in April and currently has a market capitalisation of around $569 billion. But the company – which was a member of the trillion-dollar cap club in early 2022 and was still valued at more than $920 billion in 2023 – is a long way from recovering to its peak.
Tesla has responded by laying off more than 10% of its global workforce, equivalent to at least 14,000 employees. Earlier this week, the company announced that it has eliminated almost its entire Supercharger organisation, which has built a network of public charging stations that most major US carmakers use. This decision could further dampen EV adoption in the US.
Part of Tesla’s troubles lie in the fact that rivals such as Ford and Hyundai are catching up, with their sales reflecting strong growth in the US in recent months. By contrast, Tesla made around 387,000 deliveries to customers in the first quarter of 2024, missing market expectations by about 13%. This was its first fall in deliveries in nearly four years.
But Tesla’s challenges also reflect wider industry challenges. The company’s biggest global rival in electric car volumes, China’s BYD, has also reported lower electric car sales. EVs’ share of new car sales have remained more-or-less flat in Europe and the UK. And in the US, EV’s share of total new-vehicle sales in Q1 was 7.3%, a decrease from Q4 2023.
We appear to have arrived at what business author Geoffrey A Moore might describe as the ‘chasm’ in electric car production. Early adopters have already bought EVs and love them. Yet the industry is struggling to turn its success with early adopters into acceptance among more mainstream customers.
As Moore notes in his 1991 book, Crossing the Chasm, taking a technology product from niche success into the mass market is seldom a neat, linear process. The transition is usually bumpy as companies come to grips with what the pragmatic consumer needs and wants from a product versus what tech-savvy early adopters value.
In the case of EVs, there are still concerns among consumers about a lack of EV charging infrastructure, the distance range of EVs, insurance and maintenance costs, upfront purchase price, and resale value. Moore would argue that the chasm will only be crossed when the product and marketing fully address the concerns of the mass market.
EVs are a case study in how unpredictable the course of technology innovation can be. As was the case in the dotcom boom and bust cycle in the late 1990s and early 2000s, the speed of adoption and the ultimate winners and losers in the EV market are difficult to call right now.
While it’s generally accepted that EVs represent the future of the automotive industry – especially given concerns about climate change – the transition from fossil fuels to electric may well be slower than expected. And though Tesla looked likely to be the hands-down winner in 2022 when it joined the $1 trillion elite, that destiny today appears less assured.
Investors stand to profit from the long-term value that the EV transition will create. But we would not bet on any single company as the engine of that growth, nor would we take a position on when the value will materialise.
Our quality fund managers by design do not invest in auto manufacturers, preferring instead to invest in companies where the goods and services are consumed, which by their nature have greater levels of earnings predictability. However, our broad index trackers will indeed access the mega-cap winners of the EV ecosystem (comprising manufacturers, peripheral industries, and service providers), when the “crossing of the chasm” takes place.
“The chasm separates early adopters from the early majority, and it is wider than most people think.”
– Geoffrey A Moore, author of the influential business book, Crossing the Chasm
Global News
- The Fed kept rates unchanged for a sixth straight meeting on Wednesday as it will take longer than expected for the central bank to become confident that inflation will go back to 2%. However, chairman Jerome Powell’s comments seemed to close the door on a rate hike as well. Inflation figures reinforce concerns of persistent price pressures that are likely to delay any interest-rate cuts.
- At the same time, the Fed said it will significantly curtail its quantitative tightening programme – selling off its assets to decrease money supply and increase interest rates – from June. US Treasury yields fell on the news.
- The Fed’s interest hike programme means that savers made $315.4 billion in interest in deposit accounts in 2023, four times the $78.7 billion they earned in 2022, according to Lending Tree’s Deposit Accounts.com, which used data from the Federal Deposit Insurance Corporation in its calculations. These extra savings are being spent by consumers and, ironically, this supports a fringe theory by certain economists that higher interest rates have actually been a support factor in the resilience of the US economy.
- US consumer confidence fell in April to the lowest level, since mid-2022 as Americans’ views of the labour market and their outlook for the economy deteriorated. The figure marked the third straight decline and was worse than estimates in a Bloomberg survey of economists.
- Every major currency in the world has dropped against the dollar this year, which could have serious consequences across the global economy. Its recent strength comes from a shift in expectations about when and by how much the Fed may cut its benchmark interest rate, which sits around a 20-year high. The dollar index, a common way to gauge the general strength of the US currency against a basket of its major trading partners, is hovering at levels seen in the early 2000s (when US interest rates were also similarly high).
- Global gold demand in the first three months of this year rose 3% to 1,238 tonnes – the strongest first quarter since 2016, according to the World Gold Council’s latest quarterly report. Central bank buying remains central to this trend, especially from emerging markets.
- The eurozone exited recession as its four top economies, Germany, Italy, France, and Spain, grew much faster than expected, though the recent retreat in inflation stalled. First-quarter gross domestic product increased by 0.3% from the previous three months – the strongest pace in one-and-a-half years. Consumer prices rose an annual 2.4% in April, matching March’s pace and in line with analyst estimates. More than a decade after painful austerity, Greece, Portugal, and Spain have been growing faster than traditional powerhouses like Germany.
- The International Monetary Fund boosted its growth forecast for Asia this year to 4.5%, 0.3 percentage points higher than the October regional outlook but a slowdown from last year’s 5% pace. This reflects a rosier outlook for the region’s two largest economies, India, and China, and flags a possible upward revision in its outlook for China.
- Japan could have conducted its first currency intervention since 2022 to prop up the yen on Monday, according to a Bloomberg analysis of central bank accounts. Speculation that the Japanese authorities intervened for a second time this week came as the yen advanced more than 3% against the dollar late in New York on Wednesday.
- Amazon.com’s cloud unit posted the strongest sales growth in a year, showing that its most profitable unit is recovering from a slump as businesses resume spending on technology projects, including AI services. The Seattle-based company posted a first-quarter operating profit of $15.3 billion. Revenue increased 13% to $143.3 billion in the period ended March 31. Both figures beat analysts’ estimates.
- Apple’s shares jumped almost 7% in late trading after the company posted stronger-than-expected sales last quarter and predicted a return to growth in the current period, sparking optimism that a slowdown is easing. Though revenue fell 4.3% to $90.8 billion in the March quarter, that was better than the $90.3 billion predicted by analysts. Profit also topped Wall Street projections in the period. Apple also announced the biggest stock buyback in US history as it purchased $110 billion in shares. Apple has already spent more than $650 billion buying back its own stock since 2012, according to data compiled by Bloomberg.
- Intel shares closed down more than 30% in April – their worst month in over 20 years because the chip maker continues to struggle with executing a turnaround. It has dropped 38% this year, making it the weakest performer in the Philadelphia Stock Exchange Semiconductor Index, which is down 3.6% in April but remains up 13% for 2024.
- Huawei’s net profit leaped 564% to $2.71 billion in the first quarter as revenue was driven by digitalisation, intelligence applications, and decarbonisation. Huawei’s revenue for the quarter to the end of March rose 37% to 178.5 billion yuan. Huawei is continuing to recover from US sanctions yet is also allegedly secretly funding cutting-edge research at American universities including Harvard through an independent Washington-based foundation.
- Novo Nordisk is Europe’s most valuable company. Its market capitalisation of more than $570 billion is bigger than the Danish economy. The stock has quadrupled since the start of 2020 and during this period has been a holding within our preferred quality-style portfolio, namely the Fundsmith Equity Fund. The drugmaker’s income tax bill in Denmark last year was $2.3 billion, and its massive investments and heightened production helped the domestic economy expand almost 2% – more than four times the EU average for that period. Goldman Sachs has estimated sales of these weight loss drugs to reach $100 billion a year by 2030. However, Novo Nordisk’s share price slid by 5.2% this week as a US rival’s comments on an experimental obesity drug gave rise to concerns about rising competition in this field.
- Shares of cannabis-related companies jumped on Tuesday after the US Drug Enforcement Administration moved to reclassify marijuana to a less dangerous drug category in what would be a historic shift for the industry. The MJ PurePlay 100 Index, which tracks the industry globally, rose 22%, the most since October 2022.
- As at Thursday’s close the S&P 500 was 0.7% down for the week.
Local News
- The EFF and uMkhonto weSizwe could receive a combined 20% nationally or 5.5 million votes, which could see the two parties led by populist leaders working together. These are the latest stats from global market research company Ipsos. It says the EFF could receive 11.5% of the vote and MK 8.4%. At provincial level, the ANC and EFF would likely join forces to form a Gauteng coalition government if they get enough for a majority.
- Should a national coalition government emerge, South Africa may struggle to make much more progress on resolving the country’s longstanding issues, Moody’s Investors Service cautioned. Asset allocators are hedging against a potential EFF-ANC coalition after the election as they are worried that a partnership between the two parties could result in capital outflows.
- President Cyril Ramaphosa, speaking at the trade union federation Cosatu’s National Workers Day rally in Cape Town, said more needs to be done to rectify the damage of apartheid. He said land needs to be returned to those who work it, while people still need basic education and high unemployment needs tackling.
- Meanwhile more than 37,800 government employees earn a salary of above R1 million while 117 civil servants earn more than R2 million. In 2023/24, the government spent R45.3 billion on the salaries of these employees alone.
- Eskom has said improvements in its fleet of ageing power stations spurred by the Energy Action Plan and the generation recovery plan are why load shedding has been suspended for more than a month. But renewables and a decline in demand also seem to have aided the power situation. BusinessLIVE columnist Tom Eaton says the power will go off again a day after the election, echoing sentiments made by opposition parties.
- South Africa is steering towards a water deficit of 17% by 2030 as 60% of the country’s rivers are overexploited, 40% of its wastewater is untreated, and untold volumes of water are lost to leaks in ageing infrastructure and exploitation from agriculture and manufacturing. Of the 824 water treatment works in the country, only 50% are operational, with 30% in a critical state and 20% in a poor state.
- At the current level of R18.50 the USD/rand exchange rate is now back to where it was in early May 2023. Although the exchange rate has essentially moved sideways in the last 12 months, it has been volatile. In early May last year, our Investment Committee’s fair value estimate was around R16.90 while now the fair value estimate is at R18.25, reflecting the upward pressure exerted by the strong US dollar.
- The latest Absa Purchasing Managers Index showed some improvement in April due to reduced load shedding, rising to 54 index points from 49.2 in March. This rebound has been supported by improved business activity, increased domestic demand, and a relief in port congestion, coupled with a month without load shedding. Unfortunately, Absa expects Stage 2 blackouts to return during winter.
- The South African Post Office’s business rescue practitioners say their application for funding from the Temporary Employment Relief Scheme has been rejected. This means retrenchments – which the application hoped to limit – will have to be implemented as planned. Nearly 5,000 staff will be affected.
- Sibanye-Stillwater has taken the Department of Mineral Resources & Energy to court to force it to grant the miner a mining right for the promising exploration project. The dispute is over the granting of a mining right licence over an exploration project called Akanani to an unnamed third party. The department argues that Sibanye’s prospecting right had expired.
- Naspers added R131 billion in value thanks to new gaming releases in China, a big piece of business for its biggest earner, Tencent. Chinese tech giant Tencent announced last week that it would release a highly anticipated mobile game, Dungeon & Fighter Mobile, earlier than expected in China. This earlier release date has investors excited about the potential revenue boost for Tencent and could signal a turnaround for its gaming sector.
- As at the time of writing the rand was 1.5% stronger and the ALSI was 1.7% up for the week.
Sources: Dynasty, News24, BusinessLIVE, Bloomberg, Reuters, Daily Maverick, NYT, CNN, Analytics Consulting, SABC News, etc.