Volkswagen aspires to become EV leader, tech stocks like pause in rates

The market is reacting positively to yesterday’s battery day and today’s long-term targets for EVs sending the shares up by 21% over the two trading sessions. Several analysts have argued in the past two days that Tesla still has an advantage of 4-5 years in battery technology and that Tesla will defend its leading position and become the Apple of EVs while Volkswagen will likely become Samsung of EVs. Analysts are betting that cars will not continue to be a commodity and that a new ecosystem will be developed including a bigger role for software.

Our overall take is, that these comparisons of the smartphone industry to the car industry makes no sense as the daily use case, price points etc. are totally different. Cars are much more complex consumer goods and repairment and services are far more costly than your daily smartphone. This means that a broad service and repair network is crucial and something Tesla has lacked in Europe which has cost it market share this year despite a rapidly growing EV market in Europe.

Ultimately, we believe the car industry will continue for a while to be a heavily commoditised industry with low margins. Profits will slowly shift from ICEs to EVs, and then finally on mobility services and entertainment. There is a scope for entertainment content in the future, but the limited time available in cars for most people and the need for still driving reduces the value of this time for entertainment, at least in the short-term. Self-driving car technology could make a difference for unlocking the value in mobility and entertainment, but almost like fusion energy it seems like a future that ‘is just around the corner’ but never really arrives. It is a really hard problem to solve.

For thing is for sure, 2021 will be a challenging year for Tesla as competition will accelerate in Europe and China, and Tesla will still have to play catch-up on manufacturing capacity. The years ahead will make everyone much wiser on the trajectory and future of EVs.

Interest rate sensitivity has vanished again

Yesterday’s session was a clear indication that the interest rate sensitivity that kicked into technology stocks during the rise above 1.2% in US 10-year Treasuries has disappeared again. Technology stocks are slowly climbing back highlighting that it was the rapid change in interest rates that was the real concern. Our view is still that the overall technology sector will do well even with US 10-year yield rising to 2% or 2.5% but that the most expensive pockets of the technology sector will suffer on that higher discount rate on future cash flows.