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Will Baillie Gifford’s Bet on Tesla Stock Pay Off?

Josh Enomoto

I’m not breaking any new ground when I say that Tesla (NASDAQ:TSLA) is an incredibly frustrating investment. The company’s innovative prowess has seen Tesla stock deliver massive profits for early shareholders. But its operational sloppiness and unnecessary controversies have hindered its true potential.

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Last year represented all that’s right and wrong about with the vaunted tech firm. Multiple times, the Tesla stock price was on the verge of hitting a fresh, all-time high. But on each occurrence, something got in the way. In the end, shares turned in a choppy performance, giving neither bulls nor bears a clear advantage.

Supposedly, though, that sentiment will change following a strong show of confidence. Iconic U.K.-based investment management firm Baillie Gifford increased its stake in TSLA stock, buying 108,931 shares in the fourth quarter. With that move, Baillie Gifford owns more than 13.2 billion shares. Additionally, it became the second-largest institutional shareholder.

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The move is a curious one. On one hand, the company has produced some positive earnings results that bolster management’s ambitious production goals. But on the other hand, it has a history of questionable decision-making and business practices. Arguably, this factor sparked the flight in TSLA executives and high-profile employees.

Naturally, this begs the question, why is Baillie Gifford so decisively confident in TSLA stock? Ultimately, the answer comes down to the company’s dynamic and enigmatic CEO, Elon Musk.

Baillie Gifford Bets on Musk, Not Necessarily Tesla Stock

It’s important to note that the investment firm’s increase in its TSLA stake didn’t occur in a vacuum. The organization has a consistent and repeated history of doubling down, even when conventional wisdom dictates a cautious approach.

After Musk made his controversial — and many would argue illegal — remarks about taking Tesla stock private, he invited sharp criticism. Nevertheless, Baillie Gifford stood by its high-profile investment, which is no small gesture. The firm has a 110-year history, and has made a name for itself more recently through early positions in Amazon (NASDAQ:AMZN), Alibaba (NYSE:BABA) and Facebook (NASDAQ:FB), among many others.

Similar to TSLA stock, these names suffered from a perception problem. For instance, Amazon and Facebook weren’t consistently profitable until recently. Alibaba runs questionable accounting methodologies that draw skepticism and outright suspicion.

But prior to Amazon chief Jeff Bezos’ lurid tales making headlines, no other executive within Baillie Gifford’s portfolio generated high-profile controversies as frequently as Musk. Yet his genius arguably convinced the investment firm to ride the choppy waters.

Last October, Baillie Gifford made waves when management announced they will inject more capital into Tesla if necessary. Tellingly, Nick Thomas, a Baillie Gifford partner, stated about Musk, “If he needs more capital we would be willing to back him.”

Note the wording. Thomas didn’t say if Tesla the company needed more capital, but rather Musk the individual. Am I reading too much into an isolated quote? Under the broader context, I doubt it. Most of the allure behind Tesla stock is directly linked to Musk. Otherwise, without the dynamic leader, Tesla is merely an automaker.


Will the Gamble Pay Off for TSLA Stock?

Now that we know why Baillie Gifford upped its stake in Tesla stock, we have another question to ask: Will the gamble pay off? That answer presents a murkier picture.

On paper, maintaining confidence in Musk appears an easy choice. His tech know-how isn’t just limited to electric and driverless vehicles, which are already lucrative industries. Instead, as the innovative SpaceX program proves, Musk wants to push the boundaries of known physics. That’s music to the ears of any tech-centric asset management firm.

But a flipside to this narrative exists. Based on the current Tesla stock price, shares haven’t moved since the spring of 2017. Two years is a long time to hold a tech company that is essentially a perpetual start-up. Obviously, you’re not receiving dividends off TSLA so you have an opportunity cost when it goes rangebound.

Finally, as much of a genius as Musk is, he might be too smart from a practical perspective. While Tesla’s Model 3 dominates all other electric vehicles, the EV market itself will take time to grow. Primarily, EVs just aren’t practical given our current fossil-fuel based paradigm. Plus, anyone living in apartments and without access to a personal garage will find EVs even more cumbersome.

In addition, the combination of other factors, such as demographics and infrastructure may mean that EVs won’t find substantive growth until the 2030s. Again, that’s a long time to wait, especially within the impatient tech arena.

Ultimately, I don’t doubt Baillie Gifford’s sincerity in their investment in Elon Musk. Despite my mixed feeling about Tesla, I’ve never doubted Musk’s intellectual brilliance. That said, TSLA stock needs business smarts to back up the scientific innovations.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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