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.
