In the days preceding the latest move by US officials to sue Elon Musk, an asset manager from Tesla's second largest shareholder said he was going to make a 100 per cent return on his investment in the electric vehicle maker. 

In an address to financial advisers in Sydney two weeks ago, Scott Berg, a portfolio manager with T. Rowe Price - Tesla's second largest shareholder, according to Morningstar - reaffirmed his belief in the company.  

"I think I'm going to make 100 per cent on my investment in Tesla over the next three years," Berg told a group of advisers during a Sydney visit. 

Berg was speaking ahead of developments overnight in which US regulator, the Securities Exchange Commission, filed a lawsuit accusing Musk of fraud. 

The SEC has sought to ban him as an officer of a public company, saying he made "false and misleading" tweets about taking the electric car company private.

During his Sydney visit, Berg addressed Musk's character, saying there was no question in his mind the Tesla founder was a visionary CEO, and that personal eccentricities were simply part of the package.

"As an investor it's really important that you meet with the founders and from day one I knew that Elon was a genius type who had some very weird personal eccentricities," Berg said.

"Well Steve Jobs was like that too - he had his issues, he was difficult. With Elon I expected bumps along the road - it's part of the uniqueness of what he does."

Musk has been embroiled in several scandals this year, including smoking marijuana on a podcast, and calling a British diver in the Thai cave rescue a "pedo".

The SEC's lawsuit, filed in a Manhattan federal court overnight, comes less than two months after Musk told his more than 22 million Twitter followers on August 7 that he might take Tesla private at $US420 per share, and that there was "funding secured."

Tesla shares tumbled 12 per cent in after-hours trading following the SEC announcement and are currently trading at $270.90.

According to the SEC, Musk "knew or was reckless in not knowing" that his tweets about taking Tesla private at $US420 a share were false and misleading, given that he had never discussed such a transaction with any funding source.

Elon Musk Tesla

Tesla founder Elon Musk has been accused of fraud by US regulators

The SEC alleges Musk also knew he had not satisfied other contingencies when he declared unequivocally that only a shareholder vote would be needed.

"Neither celebrity status nor reputation as a technological innovator provides an exemption from federal securities laws," Stephanie Avakian, co-director of enforcement at the SEC, told reporters.

It remains unclear how this will play out for both the company and Musk himself.

Second largest shareholder

According to Morningstar, T. Rowe. Price is Tesla's second largest shareholder at 7 per cent ownership, and the stock is the sixth largest holding in the Global Equity Fund as at 30 June 2018.

Outlining his investment thesis, Berg said he looked for four key aspects when assessing a company: a unique transformative product with large addressable market, a great business model and a visionary founder and capable chief executive.

On product, Berg says that while other companies make electric cars, Tesla is in a class above the rest.

"BWM actually got to electric cars pretty quickly, but I'll go on record today and say that I think the i3 is the unlikeliest, smallest, most dysfunctional car they've made.

"As an electric car, does it drive itself? No. Does it look great? No. Does it have a long range? No. We're not just looking for any electric car. We look for things that are truly unique and transformative inventions or technological changes. Things that are really big."

Berg predicts that within four years, Tesla will sell as many cars as the entire global sales of the BMW 3-series - at a higher selling price and manufactured in a single factory.

The addressable market is vast, with countries like Norway and China move towards banning the internal combustible engine, Berg said. 

Shorters panned as simplistic, myopic

During his address, Berg also took aim at hedge funds and short-sellers, describing their assessment of Tesla as simplistic and short sighted.

"The hedge fund guys (the bears) have been saying for the last two years that Elon Musk always over promises and underperforms, and actually they have been right six out of eight quarters.

"I've always said I can't predict Tesla's quarter, but the thing is, at the start of this year they had a magic number to get to 5000 cars made in a week. Right now, they are making 6000 a week.

"They didn't do it in the first or second quarter, but they got there and frankly from this point forth it doesn't really matter if they got there two or four months late."

Berg anticipates Tesla will be one of T. Rowe Price's top-10 bet performing stocks over the next decade.

Morningstar equity analyst Seth Goldstein has applied a $179.00 fair value estimate, believing the stock is over-valued at current levels.

 

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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.

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