Fund Manager: Tesla and SpaceX are worth far more than investors realize

Tesla and SpaceX are seen by many investors as expensive growth companies. Fund manager Christopher Tsai looks at this very differently. According to him, Elon Musk's companies can be regarded as value shares, because their current investments must lay the foundation for much higher profits in the future.

According to Tsai, investors make a classic mistake when they only look at the current profit and valuation. Companies that are now investing large amounts can put pressure on their results in the short term. However, the same expenses can lead to a sharp increase in company value in a few years.

Tsai is President and Head of Investments at asset manager Tsai Capital. His portfolio includes interests in companies owned by Elon Musk, including Tesla. His fund also invests in SpaceX, which is not listed on the stock exchange.

According to the fund manager, investors should not only ask whether a company is currently expensive. Above all, they need to examine what the company could look like in five years' time.

“You have to think about the baseline scenario, the negative scenario, and the positive scenario in about five years,” Tsai said in an interview with MarketWatch. Based on this, his fund tries to determine how much a company can really be worth.

This requires patience. For example, Tesla invests large amounts in artificial intelligence, self-driving technology and computing power. Such investments depress today's profits, while the possible returns can only become visible years later.

Tsai compares that to Amazon. The company kept its profits low for years by constantly investing money in logistics, technology and new services. In retrospect, these investments proved to be decisive for the strong position that Amazon now has.

Tsai calls his approach ‘Value Investing 4.0’. In doing so, he wants to describe a modern form of value investing. Traditional value investors are mainly looking for companies that look cheap based on their current profits, assets or cash flows.

According to him, this approach does not always work for modern technology companies. A company can deliberately make less profit because it reinvests its money in products that can later serve a much larger market.

According to Tsai, a company must meet four conditions. It must have a knowledge advantage that is difficult to copy, provide digital work, be able to maintain itself financially and be able to reinvest capital at a high expected return.

According to him, Tesla may meet those conditions. The profitable car company generates money with which the company can develop technology. These include the Dojo computer system and Full Self Driving, the software with which Tesla ultimately wants to realize fully self-driving vehicles.

According to Tsai, SpaceX also has a strong competitive position. The space company has invested in reusable rockets, satellites and launch infrastructure for years. As a result, new competitors have to spend huge amounts of money before they can reach a comparable scale.

"These are companies that are leading the way and, in our opinion, are going to create enormous value," says Tsai. "People miss that, because they mainly look at the short term."

The optimistic vision does not mean that every company that invests in artificial intelligence is automatically a good investment. Tsai estimates the likelihood of individual companies within artificial intelligence and smart vehicles becoming truly successful at just one to five percent.

His fund is therefore trying to be extremely selective. The portfolio consists of fourteen companies that, according to Tsai, have clear competitive advantages.

This includes Amazon, Alphabet and Microsoft. These companies provide a large part of the global cloud infrastructure. According to Tsai, they can benefit from the growth of artificial intelligence, no matter which company ultimately develops the most important applications.

“Whoever wins the AI race will have more and more data, traffic and computing power running through these three cloud providers,” he said.

Tsai also invests in companies that are less directly associated with artificial intelligence. For example, he is sticking to building materials company QXO, despite a sharp drop in prices. He expects CEO Brad Jacobs to take years of time to further expand the company.

Real estate data company CoStar Group was also added to the portfolio. Tsai believes CoStar's vast amount of proprietary real estate data is difficult to replicate through artificial intelligence. In addition, he sees several possible outcomes. The company may make its Homes.com housing platform profitable, but may also decide to scale back operations if losses remain too high.

Tsai's approach is therefore not about companies that look cheap by traditional standards. He is looking for companies whose current expenses put profit under pressure, but at the same time can provide a lead that is difficult to overtake.