The penny has dropped for investors around the world that the shift from petrol to electric vehicles (EVs) is inevitable.
This epiphany has been massive for the market leader in the electric segment, Tesla Inc (NASDAQ: TSLA). Its shares are up more than six-fold in the past 12 months, despite a significant pull back the past few weeks.
But for Antipodes portfolio manager Alison Savas, there is a better bet in this field.
She said that Volkswagen Group (ETR: VOW3) is making "aggressive" strides towards competing with, and overtaking, Tesla.
"Last year the German automotive giant sold around 230,000 EVs. This is expected to more than double to over 600,000 this year. In comparison, Tesla is expected to sell around 800,000 EVs," she said on an Antipodes blog post.
"Next year, Antipodes projects both Tesla and VW will sell around 1 million EVs each, then in the years beyond VW will outsell Tesla."
Here comes 'Voltswagen'
On Tuesday, Volkswagen 'accidentally' released a media announcement one month early.
According to CNBC, it revealed that it was rebadging its US operations to "Voltswagen" — to emphasise its electric credentials. The clearly incomplete announcement, dated April, was withdrawn very quickly.
The rebadge was later revealed to be a marketing stunt.
All the petrol car makers are currently playing catch up to mass-produce EVs. But Savas reckons Volkswagen is way ahead of the pack.
"If we look to 2025 – which is when industry experts expect EVs will really take off – VW could be selling more than 2 million EVs, or around 20% of VW's total volumes," she said.
"But more significantly, VW could have over 20% of the global EV market with the number one position in Europe and China, which are expected to be the two fastest growing electric vehicle markets."
While Tesla revolutionised the movement, Savas said traditional car makers have the economies of scale and know-how to "produce and sell great cars".
"Any first mover advantage Tesla had is arguably vanishing."
Embarrassingly, VW's push into electric was prompted out of a 2015 scandal when it was caught red-handed cheating on its diesel emissions tests. The current drive for full electrification of its catalogue is arguably an attempt to wipe the significant damage from that episode.
Tesla share price is dependent on perfection
The rise in the Tesla share price has seen it now valued as much as the 8 largest legacy car makers put together.
"Tesla's valuation today – some $630 billion – dwarfs Volkswagen's $150 billion, yet VW is likely to sell more EVs than Tesla in the coming years and on similar economics," said Savas.
"As a pragmatic value manager, the difference in valuation ascribed by the market for these two companies is interesting."
Tesla bulls say that the brand is more than just a maker of vehicles — it is developing technologies like autonomous driving and driverless taxis.
But Savas reckons about $500 billion of capitalisation is dependent on those innovations, and that's far too much.
"The hurdles to fully autonomous vehicles on public roads are immense. Notwithstanding the hardware and software challenges, there are significant legal and regulatory hurdles," she said.
"Tesla hasn't solved these issues – no one has – but ascribing half a trillion dollars of value to the company suggests success is guaranteed."
Volkswagen is at an attractive PE ratio
As well as the booming EV outlook, Volkwagen's other headwinds are strong.
"We have a company that's already made the investment to develop an electric range and will benefit from a cyclical rebound in economic activity and pent-up demand in the auto cycle," said Savas.
"VW is also a great way to get exposure to the strong recovery we're seeing in China, the largest auto market in the world where VW has the leading share."
Therefore Volkswagen shares look very cheap compared to Tesla, which is currently trading at a roughly 950x price-to-earnings (P/E) ratio.
"At just 8x forward earnings and generating free cash flow of over $10 billion per annum – that's post the investment in the electrification offensive – it's hard to imagine how VW won't transition to a secular growth winner as it dominates electrification."
Battery prices have long been the hurdle for the electric car industry, as it is easily the biggest cost in producing a vehicle.
But like any tech, battery prices have been coming down — and are about to reach a significant milestone soon.
"By the end of the decade, VW is expecting battery costs to fall 30% to 50% from today's $140/kwh — taking battery costs below the $100/kwh threshold at which industry experts believe cost parity between EVs and combustion engine vehicles can be achieved."
By the middle of the 2020s, Antipodes predicts VW's margins on electric cars will overtake what they make on equivalent petrol and diesel vehicles.
"For us, the EV race is one in which the spectators are fixated on the current front-runner, while ignoring the giant emerging from the pack," said Savas.
"In plain investment terminology – a case of unwarranted multiple dispersion."
