Morningstar - Q4 2021 - 73

Daniel Needham mediates a debate between Cathie Wood and
Rob Arnott at the Morningstar Investment Conference.
Wood: Tesla has created four major barriers
to entry. One is battery costs: It built its
cars on cylindrical batteries. Most other auto
manufacturers base their cars on lithium-ion pouch
batteries, which cost roughly 15%, 20% more
than the cylindrical batteries that Tesla uses. Tesla
is riding down the cost curve of the consumer
electronics industry. Most other auto manufacturers
are not.
The second barrier to entry is the artificial
intelligence chip that Tesla designed. Tesla is
taking a leaf from Apple's AAPL book.
Apple created the concept of a smartphone.
It believed that we would have a computer in our
pocket. Nokia NOK, Motorola MSI, and
Ericsson ERIC did not believe that. And you know
where they are today. Apple is dominating the
profits in the smartphone market.
The third barrier to entry is the number of
real-world miles driven that Tesla has collected.
It has more than a million robots out there
collecting data and sending it back every day. My
car is one of them. Therefore, it is able to
discern corner cases and design its full self-driving
system to incorporate these corner cases
in a way that other auto manufacturers cannot.
The fourth barrier to entry is that Tesla is still
the only car doing over-the-air software updates
to improve performance and prevent breakdowns.
Since September 2018, I have not had to
take my car in for any reason except a nail
in the tire. Well, software is not going to solve
that problem.
Needham: Rob, you've got some opinions on electric
vehicles and Tesla.
Arnott: I certainly do. We wrote a paper
earlier this year called " The Big Market Delusion, "
which looked at up-and-coming industries
that are disruptive. The market's pricing every
company in these industries at lofty
multiples, as if they are all going to succeed.
Yet they're competing against one another,
so there will be winners and losers. Look at the
Internet bubble, or the supercomputer bubble
in the early '80s.
Disruptors get disrupted. Palm was spun
off from 3Com back in the year 2000 and had an
initial value that was more than 3Com was
valued at before the spin-off. Palm was disrupted;
BlackBerry BB came along with a better
product. BlackBerry was disrupted; Apple came
along with a better product.
Disruptors are massively important to the
economy and to economic growth. But you have
to look at (a) how disruptive are they, (b) how
much of a premium are you paying for that
disruption, and (c) are they vulnerable to being
disrupted themselves?
When we looked at the electric vehicle market,
we found that as of the end of 2020, out of
eight specialists in electric cars worldwide, Tesla
was the second cheapest. At the time it
was about 25 times sales. The highest multiple
was well over 10,000 times sales, because
it was a company that had aggregate sales from
the previous year that was measured in
three digits. I don't mean three digits of production.
I mean three digits in dollars.
Peeling the Onions
Needham: So, we can say that you think valuations are
stretched within the EV space?
Arnott: Yeah. In the Internet bubble, there were
countless disruptors, and they were radically
reshaping the way we communicate, the way we
transact, the way we interact with our clients. And
thank goodness for that Internet revolution,
morningstar.com/lp/magazine
73

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Morningstar - Q4 2021

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