The value of electric vehicle (EV) maker Tesla Inc. (NASDAQ: TSLA) is one of the more polarizing issues in the stock market. It’s just hard to tell where the price of Tesla stock is headed – up or down. Whatever side you’re on, however, I’d like to show you an important aspect of Tesla stock that you may be missing.
It’s the company’s innovation premium – or at least the perception of innovativeness.
I believe it is one of the reasons shares of Tesla continue to buck logical expectations – especially because no other automaker comes close to Tesla’s perception of innovativeness. Here’s how it works.
Why Perception of Innovation Matters
Since 2005, management consultancy Boston Consulting Group (BCG) has been compiling an annual list of the world’s most innovative companies. Tesla made its debut on the list in 2013 in the 41st position. It was one of the only three carmakers to make the list that year. Japanese carmaker Toyota Motor Corp (NYSE: TM) led the industry, ranking as the 5th most innovative company globally. Volkswagen AG (OTC: VWAGY) followed with a rank of 14.
At the start of 2013, Tesla stock was trading around the $7 mark – way lower than TM stock.
Long-time Tesla followers would recollect that 2013 was also the year that Tesla stock started gaining momentum. Between its IPO and the end of 2013, shares of the EV maker gained roughly 42% (which was, of course, a decent return). However, it added a whopping 344% in 2013 alone. The stock was destined for newer records from then.
Rise of Tesla Stock
Tesla’s wild run of the last few years in the stock market has coincided with the rise in its perception as the most innovative carmaker in the world.
Tesla ranked 11th in BCG’s 2020 ranking of the most innovative companies. That’s the company’s lowest ranking since 2014. In fact, it ranked 3rd for two consecutive years in 2015 and 2016. The next best-ranking auto company in 2020 was Volkswagen at 32 – whose rise on the list in the last two years has coincided with the growth of its EV business. The German automaker sold 231,600 pure electric vehicles – less than half the 499,550 that Tesla sold.
Interestingly, researchers – including those at BCG – have found that innovation is a significant differentiating factor among companies within the same industry.
“An investment of $100 made in the MSCI World Index in 2005 would have been worth $251 at the end of 2019,” BCG wrote in its 2020 innovative companies report. “The same $100 invested in BCG’s 50 most innovative companies (assuming annual reweighing) would have grown to $327 – 30% more.”
Things get more interesting if you consider only the companies that have been featured on the list every year since its inception (see the table below).
I used the Portfolio Visualizer tool to check and found that an initial $100 investment in seven of those companies (the tool couldn’t find the ticker for Samsung) would be $1,038 at the end of 2019 – adjusted for inflation and rebalanced annually. By comparison, the SPDR S&P 500 ETF Trust (NYSEARCA: SPY), which has similar returns to the S&P 500 index, would become $266 – under the same circumstances.
Tesla Leads the Auto Industry for Innovativeness
It shouldn’t be strange then to see Tesla stock buck every quantitative reasoning to keep pushing higher. The market just has the attitude of disproportionately rewarding companies perceived as innovative.
Despite that, though, Tesla stock is still an outlier. It has significantly outperformed the stocks of all the eight companies that have featured in BCG’s list since inception.
As mentioned earlier, I believe Tesla’s off-the-chart performance is because no other automaker comes close in terms of the perception of innovativeness.
Tesla is presently the distant leader in shaping the future of the automotive industry which, by all indications, is tending toward zero-emission vehicles. There’s almost no conversation around the development of EV technologies that you won’t find Tesla at the forefront – batteries, autonomous driving, software, charging, you name it.
The way I see it, growth investors love innovation – it is, after all, a huge growth driver. And no company gives the vibe of innovation like Tesla in the automotive industry. That is the primary reason I don’t think Tesla stock will stop being growth investors’ darling for as long as they perceive it as the most innovative carmaker.
Is Tesla Stock Still a Buy?
Quantitatively speaking, you want to steer clear of Tesla stock. The numbers say that Tesla is incredibly overvalued. Analysts at Wedbush recently looked at Tesla’s valuation numbers versus those of competitors in both the tech and auto industries. Here are a few of what they found.
- Revenue growth rate: Tesla’s growth rate presently stands at 49%. The average growth rate of its competitors in the two industries in which it plays is 20%.
- Enterprise value-to-revenue ratio: Expectations for Tesla are that it will be 18.2 for 2021. Its competitors’ average for 2021 is 3.7.
Still, that’s not to say Tesla stock won’t rise any further, which is the point of this article. So know that investing in Tesla is more because of a superior, but arbitrary, qualitative trend.
On the date of publication, Craig Adeyanju did not have (either directly or indirectly) any positions in the securities mentioned in this article.