Tesla has been known to defy the odds.
Tesla has defied all laws of probability.
It's incredible the seemingly turnaround out of nowhere that they've
pulled off despite all of its issues around Elon's behavior.
This company is fundamentally changing how people move around.
But now it may face its biggest challenge yet as coronavirus crushes
the global economy. In the U.S., GDP retracted at a rate of 4.8
percent in the first quarter of 2020, and the Federal Reserve warned
the second quarter could be even uglier.
We're going to see economic data for the second quarter that's worse
than any data we've seen for the economy.
More than 33 million people have filed for unemployment since March,
which means that at least 33 million people will most likely not be
buying a new car anytime soon.
Anytime there's a con traction to consumer confidence, consumer
spending, automobiles are one of the first things to take a big hit.
And the pandemic has shut down production for all U.S.
automakers. Tesla CEO Elon Musk clearly feels the pressure.
BLEEP. Outrage, outrage.
This frustration is boiling over when you have that much asset
concentration in one factory, it's producing 70 percent of your
vehicles. This shutdown is really crippling.
So how can the electric carmaker get through this economic standstill?
Here's a look at why some experts say Tesla may be better position
than other U.S. automakers to survive.
Tesla was founded in 2003, so it already survived the Great Recession,
but it was different times for the then private company.
In 2008, it was just starting to deliver its first car, the Roadster.
The luxury market actually typically offers better than the mainstream
brands because people with discretionary spending money can continue
to purchase a new vehicle.
Meanwhile, the big three were getting a bailout in the midst of a
financial crisis and a recession.
Allowing the U.S. auto industry to collapse is not a responsible
course of action. The bailout of the auto industry back in 08', 09'
was considered very necessary because it saved thousands
upon thousands of jobs.
So if you allow GM, Ford, Chrysler to go
bankrupt and fail, it would have a ripple effect across the entire
U.S. economy. Prior to the Great Recession, a lot of automakers kind
of got into some hot water because they were overproducing.
There were some automakers that were just selling cars just to sell
cars just to satisfy these production contracts.
And of course, that's not really a great way to do business.
So when the Great Recession came along, all of that essentially
collapsed. Tesla on the other hand, never really had that problem.
The industry is in a much better position to deal with an economic
downturn now than it was then, simply because it doesn't go in
already being well over capacity and having a lot of inefficient
production issues.
And I think Tesla was probably never really at risk of those issues
because they've been a relatively small volume maker.
I think it's much easier for Tesla to quickly moderate and modulate
its production capacity during a downturn.
He's got the flexibility to add a tent, which means he's got the
flexibility to remove a tent when necessary.
But this downturn is unlike anything that has happened before.
And the timeline for the recovery is still unclear in terms of like
some of the big events that people have compared it to, things like
9/11. There is an immediate recovery the month after 9/11 in October.
We had the highest seasonally adjusted annual rate of the automotive
industry ever. And then when we look at the recession, it took years
to recover from that.
It was such a slow recovery that this doesn't feel like it's the same
either again. So people keep wanting to draw parallels, but just
haven't seen a good line in terms of like where this actually falls
in the spectrum. What's been fascinating about this particular
circumstance is that the car industry, as well as the economy in
general, was doing very well.
It's been doing well over the last few years, selling about 17
million new cars a year, which is a very high number.
So the shift in momentum, unlike the previous economic downturn, that
happened relatively quick in most people's opinions.
So that's a big difference from the last time around.
And while a specific bailout for the auto industry is not part of the
two trillion dollar coronavirus relief package, nothing is off the
table yet. There's already talk of doing a very specific automotive
financial assistance program from the government.
12 years ago, we had the cash for Clunkers.
There's talk of doing the same thing coming out of this.
And I think the automakers might be very much dependent on that to
keep them financially stable.
We don't necessarily see it for Tesla.
We don't think they're going to need it.
But for for the Detroit three, we see a high risk of another bailout,
the worst month in decades in terms of auto sales in April.
We think this weakness and new vehicle sales is going to last for some
time. So it's going to get ugly.
For an idea of whether Tesla is financially stable enough to get
through this, let's look at its first quarter earnings.
All of the major automakers had a rough first quarter, but Tesla was
able to eke out a 16 million dollar profit propelled by strong demand
for its Model 3.
This surprised some investors.
It was a much better than expected quarter.
Their automotive gross margins, most importantly, were very strong,
about 25 percent for the quarter.
So they're really improving the profitability of the auto business.
A lot of that reflects the new factory in China, which started up
late last year and is still in the ramp up phase.
But that really helped their automotive margin for the quarter.
Tesla said it delivered around 88,400 cars in Q1, including the first
deliveries of its highly anticipated Model Y crossover SUV.
Tesla didn't necessarily deliver as many vehicles as we perhaps
thought that they could.
This was gonna be their big celebration quarter.
They had just got online in China, in Shanghai.
It's just starting to produce the Model Y at a much earlier pace than
anyone expected.
It would have been a really great success story for them, if not for
the global events that completely overshadowed everything that they
had going on in Q1.
Tesla reported $8.1 billion dollars in cash flow, It has a
balance sheet that on paper can survive six months of a shutdown.
But in practice, GM, if we're if we shut the economy down for that
lie, we all know the narrative is very dark at that point.
If you look at the $8.1 billion of cash, if you go back 12
months, they had less than three billion of cash a year ago.
So they've generated significant amount of free cash flow over the
last four or five quarters.
They also did an equity offering in February.
That's also helped their their cash balance.
Musk raised two billion dollars in a stock offering before the
epidemic in China expanded into a global pandemic.
They group them as the tech company.
But at the end of the day, they build and sell vehicles.
And that is a very capital intensive industry.
And unlike GM, Ford and Chrysler, which are actually trying to ramp
down production and closed plants, Tesla is in the process of
building that up. So they have to spend a lot of money and they're
doing it very quickly.
The way they got their China plant up and running was remarkable how
quickly they're able to do that.
And I think they're looking to do the same thing over in Germany with
their new Gigafactory.
So the spending is a worry for Tesla.
We think the most prudent thing they could do here would be to do
another equity offering, because it's not clear how long this
downturn would last.
This new factory in Germany is going to be about twice as expensive
to build as the new China factory.
And they've got it to spending roughly three billion a year in
capital expenditures over the next three years.
They're going to be spending a lot more than they have in the past.
Tesla's got a certain amount of capital, but they're not necessarily
profitable. So they're burning capital and losing money even when
everything's running normally.
They're going to burn through that much quicker if their sales drop
off. But you saw the numbers that we just got for Q1 sales from
Tesla, and they were very strong.
So it's indicating that, again, they were able to be somewhat
resilient. I would see Tesla having as much or more chance to get
through this difficult timeframe than any of their competitors or any
of the domestic automakers.
Tesla stock has been a wild ride for investors, but some think it does
put Tesla in a better position than other automakers and could be a
lifeline. Their most valuable currency is the stock so they can
always do equity offering.
They've found no shortage of willingness on the part of investors to
fund the company. They looked very highly upon when it comes to Wall
Street and I don't think anyone's really going to let them fail.
Tesla trades at roughly 10 times the earnings multiples as a General
Motors or Ford or Fiat Chrysler.
Tesla's market cap exceeds those three automakers combined, which is
fairly unbelievable considering that its annual vehicle sales are a
fraction of those companies.
But some are concerned that Elon Musk's tweets could get the company
in trouble again. Last week, he tweeted that he thought Tesla's stock
price was too high.
Stock now down almost seven percent.
It was around 750 when he tweeted that the stock was too
high. Now it's at around 725.
You're going to come out and say, my stock that I own is too high.
That's harm to the shareholders.
That specifically is what the S.E.C.
had issue with the first time around.
Exactly. We attribute a lot of Tesla's success and the stellar
quarters that they've had over the last three quarters to Elon Musk
being a lot more focused, spending a lot less time on social media.
And he's he's really delivered.
So the erratic behavior really concerns us.
We don't think that tweet is the end of the story.
That will be forthcoming regulatory and perhaps some legal action
from shareholders. The biggest test for Tesla will be the second
quarter, which is expected to be much worse.
Tesla's main U.S. car plant in Fremont, California, had to suspend
operations on March 24th due to public health orders.
It was able to reopen limited operations.
But when the plant can be up and running at full capacity is still
unknown. Tesla survived actually longer than many when was keeping
production going in the US.
It's going on a state by state basis.
So when they can actually reopen or when other automakers can reopen,
it's still up in the air. And unlike the Detroit automakers, Tesla
doesn't necessarily have to get approval from the United Auto Workers
to go back to work. So they could probably restart, possibly a little
bit quicker than someone like the traditional Detroit automakers.
The company also suspended production temporarily at its battery plant
outside of Reno, Nevada, and at its facility in Buffalo, New York,
where it makes components for its batteries and its charging stations
along with some solar products.
Impacts of these shutdowns are expected to hit Tesla's balance sheet
fully in the second quarter of 2020.
The company has already implemented furloughs and pay cuts and ceased
all but essential contractor and temp assignments.
Tesla ran into hurdles when it tried to open its plant up before
shelter in place restrictions were lifted.
This is fascist. This is not democratic.
This is not a freedom.
Give people back their God damn freedom.
Its new Shanghai factory only closed for about two weeks in February
due to the pandemic. It looks like China might be through this
challenge sooner than other parts of the planet.
And Tesla will be positioned well to take advantage of that.
Tesla sold over 10,000 vehicles in China in March, its highest ever
monthly sales in the world's largest auto market.
But the bulk of Tesla's revenue still comes from the U.S.
Auto data, which crunches monthly auto sales, says the pace of auto
sales in April at 8.6 million vehicles was the lowest monthly sales
rate since the firm started calculating the data in 1980.
If we look at the traditional automakers, General Motors and Ford,
they're just trying to get through this period.
One thing that they are offering are generous incentives for
consumers. People at this point are very hesitant to buy, and many of
them are offering programs like zero percent financing for 84 months,
which is amazing.
And Tesla is a bit different.
I mean, they never want to really offer incentives.
Clearly, their retail model is different from that in the direct
selling. So that could kind of help them perhaps get through this a
little bit better. Despite coronavirus related business disruptions,
Tesla said it was able to sell cars online and deliver them to
customers with a contactless delivery option.
Throughout the U.S., they are facing a lot of the same problems of a
shortage of customers.
People don't necessarily want to spend money for a car.
Tesla vehicles, as everyone knows, are not exactly cheap vehicles.
So that's going to be an issue for them as well.
I mean, I think one thing they have going for them is that they have
a really passionate consumer base.
And a lot of those consumers in terms of demographics, skew a bit
wealthier. So I think that is going to help them.
And when you look at the long term game, which is what they're in for
is, you know, we are shifting towards electric vehicles.
In 2019, Tesla represented roughly three out of every four EVs sold in
the U.S. An influx of new EV's was expected to enter the domestic
market to challenge Tesla this year.
But now that could change.
Electric vehicles are expected to be one of the most negatively
impacted segments due to the Covid-19 crisis.
As automakers pare their investments.
I think Tesla's competitors are going to pull back from their
commitment to developing electric vehicles.
The pandemic will cause automotive research and development to decline
by 17 percent this year and 12 percent in 2021.
That decrease is expected to include new software development, which
many consider Tesla to lead in as well.
The coronavirus, I think, it's going to delay, delay, delay
automaker's plans.
And this is coming at a time when automakers were investing billions
upon billions of dollars for autonomous and all electric vehicles.
Also, don't forget that EV's, for every automaker, including Tesla,
don't tend to be high profit drivers.
And so when you've come out of a situation like this, if you're a
automaker looking to try to recover as quickly as possible from this
economic downturn, it's gonna be very hard for you and your board of
directors and your economic advisers to say, yeah, yeah, go ahead and
keep investing in these expensive, low profit EV's.
No one's going to want to admit to that, but all of these executives
are going to be re-evaluating their EV activity.
Meanwhile, Elon Musk said Tesla is ramping up investment in new
technology. We came to the conclusion that the right move
is actually to continue to expand rapidly, continue to invest in the
future and new technologies, even though it is risky.
Tesla has been fascinating because they do a solid amount of their
production in-house.
They are dependent on supplier chains like every automaker.
But I think they are less dependent.
And I think that's another advantage.
We think they're their better position than the other automakers.
The margins on the model why are going to be a lot higher because the
Model 3 and the Model Y share many of the same parts.
So they're interchangeable.
So that should really help them from a margin perspective.
If you look at Tesla's products versus the other products, it stacks
up very well compared to all the other electric vehicle models that
are out there. Plus,
Tesla has another advantage.
There's really nothing other than love.
There's just love of the car.
Brand loyalty is something that has really shifted generally down for
most automakers over the past 20, 30 years.
There used to be this sense that if you were one, say, Chevrolet or a
Ford or a Chrysler buyer, you were always that buyer.
And that was true for the previous generations.
The current generations, generally speaking, have not been very
loyal. Tesla's got this really strong brand loyalty and solid fan
base. And the equity that's built into the name as a result is quite
powerful. It's one of the many reasons why the stock valuation is so
much higher than other automakers, in spite of a lot of their bottom
line financial and production numbers being much lower.
So I think that's where there's a real difference.
Tesla has a cult following and it's something that other automakers
wish they had. And just because the vehicles are delayed or because
they missed benchmarks, they're loyal following isn't going to fall
apart. But I think that they'll be able to weather this storm.
It's not going to be, of course, easy.
It's not going to be easy for any business at this point.
But it does seem that they have set themselves up and have found such
a strong, passionate niche that they're going to be there for them on
the other side. I'm sure even if they got into trouble, it feels like
they would almost be like a go-fund-me account for Tesla to get
through the storm. Any other company you just wouldn't see that type
of fandom for.
But this company is is definitely different.