Tesla surprised investors with its resilience in the 2nd quarter of 2020, delivering 90,987 vehicles in the quarter, down just 4,213 from the same quarter last year. Tesla’s revenue was down only 5% year over year. Considering this is one of the most unprecedented recessions we’ve seen in history, the demand and delivery are both impressive. When you compare Tesla to Ford and General Motors, which saw revenue sink by half or more, the 2Q 2020 performance of Musk’s clean energy company seems almost too good to be true. Even Toyota Motors saw revenue slide by 40% year over year in the 2nd quarter of 2020.
Meanwhile, China’s Nio, a Tesla electric vehicle competitor, reported an increase of 145% in revenue, from USD$218 million to USD$526.4 million. Nio delivered 10,331 vehicles in the 2nd quarter of 2020, compared to 3,553 in 2Q 2019 and 3,838 in 1Q 2020. Nio’s net loss in 2Q 2020 was -$166.5 million, with $1.6 billion cash on hand. Clearly China’s new EV manufacturer, which prices its vehicles aggressively lower than Tesla, is gaining in popularity. Tesla is still the EV leader in China, with 11,041 Model 3’s sold in July of 2020. However, Nio’s challenge is something that Tesla is surely taking notice of.
A Spate of SPACs
Nio is proving to be quite different from the spate of EV companies that have entered the stock market through a Special Purpose Acquisition Company (SPAC). Fisker, Lordstown and Nikola are seeing their share prices soar, largely through investor FOMO (Fear of Missing Out) rather than car sales. Fisker went bankrupt in 2013 after failing to make a dent in Tesla’s market. Apollo is betting that the company can perform better this time around, though launching the IPO SPAC in the middle of a recession isn’t the best strategy for success. Lordstown, a GM-backed EV truck, won’t have its first full year of sales until 2022. Nikola’s market value is $16 billion, despite having no sales or revenue to date.
3Q 2020 Earnings
So, how will the 3rd quarter of 2020 look for auto manufacturers? For the legacy brands like Toyota, GM and Ford, 2Q 2020 was a disaster. The 3Q earnings season will start in October of 2020. If we look back to the Great Recession as an indicator of what happens to car sales in a recession, we see that even the hottest company of the day (Toyota and hybrids) saw revenue drop by 23% in 2009, from 2008. GM & Chrysler both declared bankruptcy in 2009. Toyota’s stock dropped by more than half. GM & Chrysler’s stock became worthless. So, will the 3rd quarter of 2020 hit EVs, including Tesla and Nio, hard?
We won’t get our first peek into how the 3rd quarter looks for sales until Tesla’s deliveries report the first week of October. However, perusing the lithium miners’ earnings reports provides some context. While the overall positive trend for EVs is likely to continue once we get past the current economic crisis, Livent Corporation reported on August 19, 2020 that lithium demand was weak as “customers delay planned orders until later in the year.” Livent’s revenue was down 43% year over year in the 2nd quarter of 2020. Albermarle noted that “We expect the impact of low OEM automotive production to be felt more acutely in Q3 2020 [in lithium].”
How will Work from Home, Stay at Home Orders, COVID-19, high unemployment and the current recession affect auto purchases in the 3rd quarter of 2020? The New York Federal Reserve Bank reported that there was $1.43 trillion in auto loan debt in the 2nd quarter of 2020. The delinquency rate was quite low at 2.26%. However, this statistic could be rather deceiving, due to the moratorium on collections going on. “Protections afforded to American consumers through the CARES Act have prevented large-scale delinquency from appearing on credit reports and damaging future credit access” said Joelle Scally, Administrator of the Center for Microeconomic Data at the New York Fed. “However, these temporary relief measures may also mask the very real financial challenges that Americans may be experiencing as a result of the COVID-19 pandemic and the subsequent economic slowdown.”
China appears to have arrested the current pandemic. The IMF is predicting that the Chinese economy will produce 1% GDP growth in 2020, while the rest of the world sees rates of contraction never before seen. The U.S. real GDP is predicted to contract by -8% in 2020, with Europe contracting in the -10% range.
It’s clear from the 2Q 2020 earnings reports that EVs are far more popular than old-school gas guzzlers. However, even if Nio continues its dominance in sales growth and Tesla continues to weather the storm, you are likely to be buying high if you purchase either stock at today’s prices. Most stock prices go down in a recession – even the stock of great companies.
Tesla had annual sales of $24.6 billion, with a loss of $862 million in 2019. The company was valued at $350 billion on August 21, 2020. That is a higher valuation than Toyota, GM & Ford combined. Toyota, GM & Ford were all profitable in 2019, and their combined sales were over half a trillion. Tesla's current price-earnings ratio is over 1000.
The current stock market rally is built on hope and forbearance policies, not real growth. It’s important to remember that the U.S. 2Q 2020 GDP contraction was the worst since at least 1974 (when the data began to be collected and reported), at -32.9%.
Nio’s entry into the electric vehicle space in China is notable. So far, the company seems to be making all the right moves. Nio ranked highest in China’s New-Vehicle Quality Experience Index, conducted by J.D. Power in July of 2019. The company’s cars offer luxury and affordability, coming in far lower-priced than Tesla, while also qualifying for government subsidies to help Chinese buyers with the purchase. Nio’s board boasts of executives with ties to NetEase and TenCent Holdings. Nio (meaning blue skies) could be the car company to watch in the months and years to come, and is on my stock shopping list, waiting for a better price. (Special shout-out to Mitchell for finding Nio at our Oct. 2019 Retreat!)
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About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 3rd edition of The ABCs of Money was released in 2020.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She blogs on Huffington Post and Medium, and is a frequent guest contributor to national news shows and magazines. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.