Is Tesla recession proof? Firstly I am talking about the company itself, not the stock price.
Or perhaps we could review more so how Tesla might look in a recession.
And perhaps compare Tesla to how the competition might also perform in a recession too.
Tesla is just doing so well, there is so much wind in its sails right now. But this obviously
is happening an unprecedented economic environment. We are in very strange times,
with various macro factors, and experimental monetary policies. We are seeing inflation,
although they say it's transitory, and as soon as supply chain issues are rectified it should return
to regular inflation levels, well perhaps that does help a little, but it doesn't counter all the
government spending. There is still all this extra money in the economy, that wasn't there before.
Consumers still arent able to buy all the items they want. Consumption still has a lot
of catch up remaining. Whats going to happen when consumption returns with this huge backlog, well
we are likely to see further inflation. Demand for labor will increase more, and wages will rise.
Anyway, this isn't meant to be about inflation. My point is the economy could
get out of control. Governments will probably try and fix it, for lack of better word,
and we will eventually see a market crash. You know if history repeats like it has about the
last 30 or so economic cycles. Que the "but this time its different" mantras.
But anyway I am not trying to predict market crashes in this video either,
although I do look for potential causes, like a crypto bubble, EV bubble,
or China's despotic growth coming to an end.
Anyway, chances are one day Tesla will have to operate during a downturn economy,
ok sure again, as they navigated through the GFC, through Elon's exceptional leadership abilities.
But now Tesla is a hugely profitable company, with massive cash reserves. Tesla have enough
reserves to see them through any economic downturn, without the need to any bail out.
Can we say the same about the legacy autos companies though? Well the automotive
industry is cyclical, which means revenues become much lower in an economic downturn.
Which means demand for ICE cars will drop even more, in this economic environment.
This would absolutely crush legacy autos, as if they didnt have enough problems already.
On top of that there is less money floating around in a recession,
making it a lot hard to find those 10s of billions of dollars the legacy autos claim
they are going to borrow to invest in EVs. I mean its not likely that capital was going to
be very successful anyway, but without it there is even less chance of reaching no success.
This will simply kill their chances of any EV business even further. As if the noose wasnt
already tight enough around their necks. I mean the governments will possibly bail them out,
but we cant be too sure what company is left at the time of this downturn,
legacy autos could have already closed down many plants already and laid off
large amounts of labor. There might not be much of a company left to even bail out,
especially if they are struggling with EVs still so much, and likely still not making a profit.
Yea, it super hard to bring an EV out and try and compete at the same price point as Tesla,
well I mean to do it at a profit at least. If there isnt a profit,
then its super expensive, and not sustainable or scalable.
Ok, so what does this mean. There is a good chance that in a recession,
legacy supply will reduce, but particularly their EVs too. As they may not be able to
afford to subsidize these losses on the EV side of the business any further.
The same could be true for China. Now currently just about all the EVs in China also lose money.
Well according to their financials, some are able to make their EVs for less than they are sold for,
of course including all government subsidies required to achieve that.
i.e. they have a positive gross profit, but a huge negative net profit or loss we should say.
Well you can only lose money for so long, until you need more capital.
In a down market it becomes harder to raise money. Oh also, currently I think that China will be
the most likely cause of a market crash. Which means things wont be great there in any event.
These EV companies may have to raise prices, which will reduce demand, and then they will have worse
economies of scale than now. Their only chance is a government bail out. This is how China got
through the GFC, they printed the equivalent of half a trillion dollars, and spent it locally.
But who knows, there may not be enough money to go around this time, we could see hyperinflation,
or all sorts of things. Who knows how long China can even maintain a low currency for.
Remember China is despotic, it has not grown organically, the becomes a stage when its like
pushing water. There are all sorts of issues with China. BYD may be able to subsidize their
EVs with their hybrid business still, but I don't like the chances of the others in a recession.
Oh and all these other EV companies or legacy autos have a tremendous amount of debt. Now
another reason we have an economic downturn, may be because inflation ran too rampant.
How do we fix that? Rising interest rates. What happens when you have taken on lots of
cheap money for growth, and that money suddenly becomes more expensive? And you didn't have a CFO
smart enough to help hedge inflation somewhat, by purchasing a large position in bitcoin?
Well you are in what is known as, big trouble. Yup that's got to be a tough one. Not just for heavily
indebted businesses, but governments too. A lot of homeowners are struggling to even afford their
mortgage now, what happens when their rates rise, and they have lost their job? What is government's
solution, are they going to try and print more money, only further adding to inflation?
On top of that after every inflationary period, comes a deflationary period. Their houses are now
losing value. Ok, anyway, you get the idea. Global currencies may not be able to handle a recession.
Which is why its good for everyone to have 1 to 3% of their net worth in Bitcoin.
But its going to be very tough for any businesses with huge debt,
and legacy autos have a huge amount of debt. So imagine revenue decreasing whilst costs rise.
This is what the end of an industry looks like.
Ok, so its going to be tough for any competition to even affordably make an EV,
let alone sell it too.
Therefore there is the likelihood that there will be less EV competition for Tesla.
If there is less supply from competition, then there is more demand for Tesla.
Similar to how Aromco can get a barrel of oil out of the ground for $3,
where as the US is closer to $35. If oil crashed to $20 a barrel, Aromco still make
good profits. The rest of the world, not so much. Hence why Aromco has a higher p/e ratio.
So by that logic, Tesla deserves a higher p/e ratio than every other EV company in the world,
if they were at similar stages in growth. Oh why? Because no
one can make an EV for cheaper than Tesla. In other words, if demand was so bad in the
economy, Tesla could temporarily reduce prices to increase sales,
whilst still likely hitting 25-30% margins, at least when their in-house batteries are going.
I believe Tesla would use this pricing strategy, they are doing the opposite right now, i.e. demand
increases, raise prices, so if demand decreases it would be axiomatic to assume they reduce prices.
But, now this is something I really hope, that there will be no market crash before
the Model 2 is in volume production. And possibly Robotaxis too. There will be no cheaper version
of transport available. In a booming economy people invest their time into making money,
when the tide comes out, people then spend their time on consolidating and cutting costs.
There will be no car with a cheaper cost of ownership than a compact Tesla. Tesla may
even help people with financing too. Anyway, I would call this a recession proof car. And
I also expect it to be about 50% of Tesla's auto sales by quantity. This is why I hope
the recession can at least last this long. Especially of Robotaxis are available too,
which means people don't even need to think about outlaying large sums to own a vehicle.
Oh right, people are willing to put some time and effort into researching ways of saving money,
possibly things like solar and energy too. If someone can save $50 to 100 a month on power, then
its probably worth doing. Yea, I think the energy business should be fine in a downturn economy.
But back to cars. Now say if demand vehicles dropped half,
very unlikely, but its an easy number, and shows my point even stronger. Lets just use
some easy numbers and say its for the US. Say if demand goes from 20 million cars a year,
to 10 million cars a year. Does that mean Tesla's sales will drop 50%?
Well demand for EVs is increasing at a really fast level,
Tesla already have a huge backlog. So if the aggregate demand for vehicles was to drop in half,
and even if that was EVs too, well we arent making enough EVs close to covering demand currently,
so it might just mean the waiting lists for Tesla's reduce, even in an down economy.
And don't forget how well Apple did through the great recession. Yea,
somehow I think Tesla will survive anything the market can throw at it. And it will end up coming
out the other side, with fewer competitors. Which may not be the best for the global EV transition.
Thanks