Every Monday Owen Rask runs a Selfwealth live session where we chat directly to the community, analyse stocks, and add holdings to our virtual portfolios.

This week, we changed things up by bringing on an expert investor: Danielle Ecuyer.

Danielle boasts an impressive, decades-long career in the investing space. She's one of Australia's leading investment educators and commentators, and also one of the country's foremost experts on Tesla stocks. So, we brought her on to pick her brains on the topic, and get a knowledgeable run-down on the company's strengths, weaknesses, and talk about its outlook.

You can watch the episode above (it's about 30minutes long, and starts at 13minutes in), but you can also scroll through the transcript below.

Note:

1. The below transcript has been lightly edited for clarity, but may contain nuances of conversational speech.

2. Owen Rasks questions are emboldened.

3. We have blocked out differing sections with titles 

Danielle Ecuyer's Start in the Investing Industry

Danielle is an experienced investor and also a two time author, welcome to the show, Danny. It's always a good day when I'm chatting to you because we get to talk investing we get to talk basically about some really exciting companies. One of the companies that we're going to talk about is of course, Tesla, which I know you've appeared on your own podcast. You've got on the Shareplicity company website. You've got access to some discussions there as well as on YouTube. And I know that you know this company really well. So I'm hoping to tease out some insights and hoping the audience to can get some insights from you today. Before we get to all of that, though, before we start answering some listener questions. Can you tell us a little bit more about yourself? How did you come to be an investor and an author?

Well, really briefly, I used to be an institutional equities broker. I started in the research department in the late 1980s. So my baptism of fire was basically the 1987 crash. And I started very unglamorous sectors, building materials transport, as well as a few spicy stocks.

That used to be thrown my way when nobody else wanted to look at them. The career in London was probably my longest stint or phase where basically I transitioned from an analyst to being an equity salesperson for some of the largest institutional clients in the UK, and predominantly selling emerging markets.

I started in the smaller emerging markets, typically known as to Taiwan, Indonesia, Philippines I was particularly well known for broking Indonesia and Philippines, and again lived through lots of crashes including the Asian currency crisis, the collapse of Barings where I worked, which was quite traumatic, and ultimately moved to a global emerging markets product and then a brief stint in funds management which was really interesting.

So that was transitioning from being on the sell side when I was an institutional broker to being on the buy side. And when I kind of gave up my career to have my son and I ended up moving back to Sydney. Over a period of time around the crash, I actually took control that's the GFC crash.

I took control of my own funds, so in 2008 I decided I'd probably be better off doing it myself, because I know myself better than anybody else does good or bad as the case may be. Sometimes. And when my son was deciding while he was doing his HSC because I basically gave up my career in finance, per se. I decided that I wanted to write a book and what better topic than share investing because I have now, fortunately or unfortunately, been doing it for a few decades.

Danielle Ecuyer's Best Investment

It's interesting your story because you've effectively trained as a professional investor, and then you've had your son and then at the same time, or around that same time you've thought okay I want to take control. We've spoken you and I've spoken previously on a separate podcast where we talked about why you took control. But I think this is really interesting because we are appearing here on the Selfwealth Live Show. And we're talking to investors who also want to go on that journey who want to enrich themselves and we want to become private investors. So can you just tell me a little bit more? This is a cheeky question for me: what's maybe your best investment that you've made and why.

It's one of those answers that not everybody wants to hear. Because actually investing in myself and constantly learning and reading and recognising that investing styles can change. So my predominant focus is been to grow, particularly the superannuation self-managed super fund is to grow it without taking extreme risk or suffering too much capital loss. And the reason is, is because I basically haven't had an income per se for many years. Within that context, some of my sales have been some of the best investments I've ever made.

So in 2015, I decided that I would completely restructure my self-managed super fund. It had been very traditional in nature. I held a lot of bank stocks, Telstra, Wesfarmers, all those classic stocks, but they've I think at some point I held the likes of Origin ATO when they were high dividend payers, and they were also much higher share prices. As the reason why I sold them. And in retrospect, it was a very smart move because a lot of those share prices have not moved back to those previous highs, possibly with the exception of Commonwealth Bank, although dare I say I didn't hold that. Because probably like a lot of people I used to make what I perceived sometimes these being an error of judgment, I said it was too expensive. But ultimately, that's been the best performing bank in Australia.

So I would say my ability to read, learn, constantly grow as an investor. It's not a static process. And I think it's often really hard for investors to understand it's not only about buying great companies over the longer term, but actually sometimes recognising that not all companies are going to stay in the portfolio.

Should You Hold Cash in a Market Crash

It a really interesting point. So you've got two things there: your ability to sell really well, which is the part that I see a lot of investors struggle with, but you've also said that kind of curious nature the ability to adapt and learn is one of your core strengths, and it's a great investment you've made. We've just had some questions come through today [on the live chat]. I know we're going to get Tesla in just a moment. You There was one question that's come through here really quickly, asking Danielle: what's your view on investors moving to cash?

It's a really, really good question. So yes, I have increased my cash holdings. Should I have done it sooner? In some instances? Yes. With the benefit of hindsight, I actually went to cash in 2000, early 2008. And I think this is a really good example of how conflicting investing can be for retail investors. And the reason is, is that I was very concerned about what was happening in the US housing market and these collateralised debt obligations in the run up to the end of 2007. And it was highlighted when I was at the perpetual ATM, and they were flagging that they had potential losses coming through from holding these instruments.

I then went to the gentleman who was managing my money and I said, can you please sell perpetual, which actually turned out to be a high in the stock. I think it was around 74 or $78. And I said to him, look, I'm really uncomfortable. And he goes, don't worry. We've got some protection.

I think they were buying some puts on some major stocks. And of course, buying protection if the market is going up is very expensive. So they actually removed all the puts' in around December of 2007. And lo and behold, markets started to tank in January. I had been very worried about the markets, their attitude as a professional fund manager is don't worry, you invest through the cycles come rain, hail, or sunshine. And don't worry, you know it will be all right in the end which is correct, because some stocks did exceptionally well like CSL and then some stocks. Like I think in the case of Westpac NAB, they've never returned to those highs again.

So the problem is for US retail investors is: when do we really catch on that we want to preserve our capital, and the challenge is always getting the money back into the market. That is a very hard thing to do psychologically. And maybe some of you experienced that. If you went to cash or you were in cash in the corona crash on March 2020. And spotting we can never pick for Boston but that market turned very, very quickly once the Fed came in and intervened and started buying bonds mortgage backed securities and started clearing basically what was a dysfunctional financial market. So my suggestion is, on selling out completely particularly in your hold stocks that you want to keep for the longer term I don't think anyone should do it from my personal experience. You can downsize the whole thing. But selling out completely makes it really hard to bite the bullet and get back in there again.

Tesla's Backstory

Yeah, and I think that's true. Danny, in my experience I've seen on many investors try to time the market, like it's almost like it's all or nothing when I'm in or out. And so most of the time we are given these false choices in investing where it's not all and it's not nothing. It can be something in between. And it is also I think one of the things that I've learned from listening to you over the years is that it's important to back your own judgment to if you believe something, but and you do the work it's your back yourself because you have your best interests at heart.But anyway, we've talked enough about this I think people want to hear your views on Tesla. I've just got Tesla in my Selfwealth account here and I can see the shares are hovering about $850 or so. Can you, because I know you're one of Australia's famous experts on Tesla, can you teach us a little bit about the business backstory? I know one of the things that struck me which I had looked this up previously was Tesla wasn't actually started by Elon Musk.

No, it wasn't, he came in later. Just a point of fact I own the shares. I have owned them consistently since 2019. Before that, I was kind of in and out a bit tentative to say the least. I always used to get told my friends love the product, don't own the shares. And I'm sure some of your listeners have also been told that and if anyone's had the joy of being in a Tesla, it is an amazing experience.

So Elon musk becoming involved in the company I outline in my second book the reasons why, but cutting to the chase, it started with concerns over oil. Those soon faded, it became about a decarbonisation story through mobility. And he basically is tackling two of the largest markets total addressable markets in the world, which is automotive mobility and transport and the energy markets, specifically oil.

And at the turn of the last century, not the 21st century, the 20th century, they actually had basic electric vehicles. And the only reason why the likes of Ford took off was that they found cheap, abundant oil. And that is the irony of history that this is actually not a new invention. But ultimately, the technology had to evolve to such a degree that it could become cost competitive with cheap oil. And Musk has really been a labour of love, a tortured mission. He basically said, I think there is a great, great quote, I tweeted the other day, Charlie Munger said this company will fail. And Elon Musk responded by well, if so I'm going to die trying, and I think that pretty much sums up what Elon has been through.

But ultimately, he has achieved this company is now producing probably annually, at least a million vehicles a year and they are doing it profitably, and they are being the most profitable, probably aside from Ferrari. But that's a completely different business model. That's very low volume, high spec, high margin.

But to give you an idea, the earnings before interest tax margin, on Tesla sales is at 20%, and sitting at 5% for General Motors and Ford. And the whole point that people need to understand who the electric vehicles, they are not the same as producing an internal combustion engine. It's a completely different engineering process and it's a completely different vehicle. And the thing what Elon has had the benefit of being able to do is that he had a green slate a fresh slate, so he could start without being encumbered by all the legacy processes and business models of the existing car manufacturers. So when anyone wants to look at what has probably been a success, apart from the fact that the guy is clearly a genius, yes he can be incredibly juvenile on Twitter. But nevertheless, he is an engineering genius. And he's been able to say, Okay, I want to produce, his goal is 20 million vehicles. By 2030. Huge amount. Ridiculous.

Most people think he won't be challenged to get to 10 million vehicles and there's a measure for your the audience to understand the largest car manufacturers in the world, which is basically Toyota and VW are currently producing around 10 million vehicles. So that won't give you the scale of his ambition. And by hook or by crook getting buying one of the oldest factories that have been abandoned by Toyota, if my memory serves me correctly, Fremont in California. He turned around that old factory and made is one of the most efficient manufacturing plants in the world, albeit Shanghai because he could start from scratch is even more efficient.

Calculating Tesla's Opportunity

I've often heard investors and this kind of this is a bit of a comment off the off the cuff, people will say that investments climb the wall of worry, or the stock market climbs the wall of worry. And I think Tesla is one of those companies. It's created so much friction in the automotive space simply because it is so much better. And we see that and then people begin to worry, people begin to think this car worker can't possibly work like probably Daddy, I could just digress quickly. One of the one of the best criticisms I heard of Tesla was wood there aren't that many people to buy such an expensive car, you know, and I thought well, that sounds about right. You know how many people can afford $100,000 car? I don't know that many, you know.  So how do you weigh up I guess the size of the opportunity for Tesla? How do you get confident? I'm just looking to Selfwealth account now. The company's current market cap is around $880 billion. How do you get comfort with a company being so big?

There a few thing there. First of all a car is in US dollar and you have to differentiate between the models and I think that worth highlighting, the Model 3, I think, is about $70-80,000 in Australian dollars. That's the first point.

Tesla is fully aware that to be ultimately very successful, they have to drive down costs and that's why they bring a they have horizontally and vertically integrated so a lot of the processes of the manufacturing process are coming in, in sight the business okay, so traditionally, existing automotive manufacturers would have dealerships everybody knows you buy your Tesla online for example, they created online software so that you could fix these cars because, usually the car only breaks down because of the software rather than the traditional cars. You don't have to change the water you don't have to do any of that it's the tires that actually go so when you look at the valuations of Tesla, and you look at the market cap of Tesla because a lot of people focus on it.

Just to remind everybody of how stark these comparisons actually are  in terms of the, so I think Ford's market cap is currently about $70 billion. And that's actually after the stock has rally really hard in the last 12 months. Tesla as you said, it's around $900 billion.

Now, the scale of difference is that and I'm quoting somebody called Gary Black here, so you can follow Gary Black on Tesla. He's a fund manager. He has he runs his own listed actively managed ETF and he is one of the Tesla bull camps, okay, that you find on Twitter.

But his numbers actually when I compare them to the likes of Credit Suisse and Morgan Stanley actually weren't completely outrageous, but he's basically saying so this year Tesla has produced around 1.4 million vehicles easily. Elon said they can compound grow at 50% and that is actually still expanding the existing factories rather than bringing on stream the likes of Austin, Texas, and Berlin, which the two new Giga factories, and Gary made the point by 2024 Tesla could produce 3.2 million EVs on a 50% compound average growth rate. Whereas Ford (cha-ching!) can do 600,000 EVs.

Now the point is with the existing manufacturers, they are really not in a great position because they have to transition all their existing factories they have to cannibalise their own products. To grow EVs. And we're not talking about companies that have particularly strong balance sheets.

So Tesla has $17 billion worth of cash on the balance sheet. They're producing free cash flow as of the last quarter of approaching 3 billion a quarter analyse $12 billion and they actually generated in that last year $20-25 billion in free cash flow having invested $6 billion this company, as I said, actually on another podcast, is this company is a cash flow monster. And people don't appreciate that.

I think the perception for many people is that Tesla is what it was when Elon Musk had to sleep on the roof while getting Fremont going. This company is highly profitable now. And it's more of these extraneous costs come out of the P&L, like his payment plans for his options.

Even if they lose all the green credits, which everybody used to make some such a song and dance about it. It doesn't matter. They're making money. And I just wanted to give the listeners or viewers some idea. Okay, so they basically made around 6.8 cents EPS last year, which puts them on a historic multiple of 129 times. I would never, ever look at a company like Tesla on a historic basis. This is a company that is growing, it has a supply constrained problem, not a demand problem. Okay, if we look to the forecast consensus is a 10 EPS, which basically puts it at around 85 times forward earnings. And that includes the likes of Morgan Stanley.

Then you have Credit Suisse, for example, around 13 cents a share and carried back at around 12.8. That brings the multiple down to 65 times, but then you have someone called Jonathan Stephenson I think it's Jonathan and has the EPS at around 17 times which brings them down to 15. And that's when the one year out.

So I guess the point is: Morgan Stanley, Credit Suisse all make the point, how many companies out in the world are actually growing at a 50% compound rate? Now, of course, nothing is set in stone. Nobody has a crystal ball. There are risks on the horizon. There's risk to bringing the Berlin factory on stream. There are risks to scaling Austin again, that's coming on stream. They're just awaiting certification on the model line. And of course, there's risks that the world could have a recession. Okay.

But at the end of the day, as we've seen over night with Mike Cannon-Brooks, decarbonisation is not going away. It's one of the biggest secular trends out there. It's very hard to pick which are going to be the winning companies in this space. But this company is so far ahead of the incumbents and Toyota is fighting tooth and nail because Toyota invested so much in hybrid technology.

Now, the other thing I just want to raise for viewers is to understand that the car market and the energy market are always politically sensitive industries. Traditionally, there have employed lots of people, as we know, they had to bail out GM and Ford was the GFC. And there is always going to be politics overlaying these markets.

And that is something that for example, Morgan Stanley has just highlighted, investors need to understand or potential investors that the politics in Germany may have changed a little. Now that Merkel has gone (around the Berlin factory) because whilst the former government was really, really keen to accelerate the EV space in Germany and their incumbents again, dragging their heels, largely due to the fact that I think they just really don't know how to do it. It's as simple as that. They go, how do we produce a car that's this sexy and has such amazing engineering feats? I think Tesla produce the model three in 13 hours Tesla. It takes VW, it's this order of magnitude, almost a turn around the five days.

So with the new coalition in Germany, I think that hopefully Berlin will go ahead because oh my gosh, it would be the most awful sovereign risk, if they were to turn around after Elon has built this massive giga factory? But what I'm trying to highlight is that lots of shares have risks. So if you're looking at it, you have to balance off the potential for this to be the largest company in the world, a few years down the track.

But like most things, and when you're growing at 15% compound rate, there's no such thing as a free lunch when you're changing the world.

ETFs With Tesla Exposure: What to Know

That's right. You covered so much there. I think we'll have time for one more question which I might take from the audience. We've also had some questions come through here, which I think that you'll be very well placed to answer because obviously we're talking about Tesla which is a US company that you can buy inside Selfwealth, but some investors are also wondering, is it worth using an ETF to get exposure? We know  like the NASDAQ 100 ETF has Tesla in it, the FANG plus ETF also has it in it. What would you say to investors that are thinking of getting using an ETF as a way to get exposure to this?

Oh, absolutely. And nobody knows the future. But I do know there are some people that expecting that the Fed could make a bit of a mistake they could tighten too much too quickly. We might get some inflation readings that are just way too high. As far as I can gather. Most houses including Morgan Stanley in the US are expecting inflation to come down over the course of the year. And then we've got some geopolitical risks. So what I'm saying is, is that I'm picking up that most people and they all could be wrong (that would probably be the best thing) that we're going to get some great even better buying opportunities.

And I remain very favourably disposed towards the likes of the major stocks within QQQ, the NASDAQ 100 as you said, and there's also a quality global ETF, I think that one can buy that may have Tesla in there as well. So I don't have a problem with ETFs. And if Tesla is as successful, as it potentially can be it will be just become the largest stock in the ETF over time.

Well, actually a really interesting way to put it, right, because if the ETF does just, you know, weight the stocks according to which one's the biggest, if Tesla gets to that point, it's going to be one of the biggest component weighting inside that ETF, so I think that's a great point you make.

So we've covered a lot of ground here, we've covered basically how Tesla can justify that the valuation we're looking at forward potential, but there's obviously a lot of risk here too. You mentioned in Germany, you mentioned that, you know, geopolitics, interest rates, these are things investors should take into account as well, as well as competition. But Tesla has a great management team. It's got an industry leading product, and it's got more potential. So it's not just as you said, the Model 3 now, it's not necessarily just about, you know, a high-end car. There's more to it now. There's so much for people to think about, but also it's kind of balancing that upside with the downside and I think that's what makes the perfect addition to our higher stakes portfolio. Danny, the portfolio that Rob and I and our viewers have been coming back every week to add to, so, Danny, I know people can head to Shareplicity.com, there's a link in the live chat for anyone that's interested. And also you're on Twitter, right, so people can find you on Twitter if they need, too.

Absolutely. And that's usually where I'm most active. You can follow me on LinkedIn. There also Shareplicity on Facebook. The one that I'm not as active on is Instagram. So if you really want to keep up to date, I do post all my articles that are published, any podcasts they will also appear on the website, but if you want to know directly what I'm tweeting and thinking then Twitter's a great place to go.

Fantastic. Well, Danny, on behalf of Rob and myself, and everyone that's viewing now: thanks for joining us.

Yes, thanks so much Owen it been a lot of fun.