Management is key to success
U.S. based Tesla designs and manufactures electric vehicles and clean energy solutions. Our investment thesis on Tesla is predicated on the company’s unique product cycle which is key to driving significant volume growth over the next few years, lean operations that enable profitability at low levels of production, and a management team that has successfully executed its business strategy over the past decade. In our view, Tesla’s founder and CEO Elon Musk is a critical driver of Tesla’s success and his operational leadership and vision is one of the reasons we have held Tesla in several Jennison strategies since 2011. However, our position size has changed over time in line with our analysis and changes in Tesla’s risk profile.
In August 2018, Tesla’s risk profile increased when investor focus shifted from Tesla’s rapidly improving fundamentals to Musk’s unconstructive behavior. During this period, Musk tweeted his desire to take Tesla private and indicated that he had secured funding to do so, prompting the U.S. Securities and Exchange Commission (SEC) to file a complaint against Tesla and Musk. Our investment team held a call with Musk shortly after the tweet and we shared our belief that, with proper execution, Tesla could be worth more as a publicly traded entity than as a private company. We discussed the impact of unforced errors and noted that we do not participate in private equity deals. The following month, the SEC announced that it had reached a settlement with Musk and Tesla that would result in comprehensive corporate governance reform, among other changes.
One element of the settlement was the removal of Musk as Chairman of Tesla’s board for a minimum of three years and the appointment of an independent chair. Other requirements included adding two new independent directors, establishing a new committee of independent directors, and putting in place additional controls and procedures to oversee Musk’s communications. We reviewed the governance changes required by the SEC settlement and ultimately determined that they had no material impact on our assessment of Tesla’s financial prospects or business model. We viewed the SEC requirements positively as they accelerated and put in place some much-needed corporate governance structures.
Frequent engagement continues
We believe Tesla’s corporate governance changes are constructive. We continue to monitor developments in Tesla’s governance and maintain contact with company management via meetings and calls. Tesla has shown increased capacity and strong execution since this incident and we believe the market continues to undervalue demand for its upcoming products, the operating leverage of the company’s business model, and its significantly improved competitive positioning.
The specific security identified and described does not represent all of the securities purchased, sold, or recommended for advisory clients, and it should not be assumed that investment in the security identified and discussed was or will be profitable. This security was selected as we believe it aptly illustrates how Jennison integrates ESG considerations as part of our investment process.