Tesla reports earnings on Oct. 21, 2020 after the markets close. On Oct. 2, 2020, in their Deliveries Report, they knocked the numbers to space. Tesla had record vehicle production of 145,036 vehicles and record deliveries of 139,300. That portends what should be the best earnings report in the history of the company. It does not indicate, however, that the auto industry is going to flourish in the current recession. And by every measure, the great news for Tesla is already more than astronomically priced in.
Electric Vehicles are Hot
On September 23, 2020, California Governor Gavin Newsom issued an Executive Order mandating that all new cars and passenger trucks in his state be zero-emissions by 2035. EVs didn’t need an executive order to be the hottest selling vertical in the auto industry. While Tesla’s deliveries are up 43.5% year over year, Ford’s are down 4.9% (to 551,796). GM vehicle sales are down 10% over the same period (to 665,192). Both GM and Ford are currently leaning into truck and SUVs, after Tesla took over the sedan market with its Tesla 3.
GM CEO Mary Barra is promising a future of “zero crashes, zero emissions and zero congestion.” She’s leaning into EVs, self-driving and connectivity in her Vehicle to Everything
Plan. GM is advising and investing in China.
Of course, Tesla is already in China with a Gigafactory and car sales and is expanding into Europe with the Berlin Factory projected to be completed in July 2021. However, the competition for Tesla is starting to heat up. China’s own EV provider, Nio, saw deliveries soar 154% in the 3rd quarter of 2020, to 12,206. That’s only 9% of Tesla’s deliveries. However, if the company’s momentum continues apace, Nio will be better able to support its rather lofty market value of $29.45 billion.
Tesla's Share Price
Tesla has had a massive jump in value in 2020, for a combined value of $416.2 billion – more than Toyota, GM and Ford combined. Elon Musk remarked on May 1, 2020 that Tesla stock was too high. Since then it has gone even higher.
Tesla’s price/earnings ratio is 1187. That’s astronomically high, even for a company that just increased sales by 43.5%. (Remember sales were down -5% in the 2nd quarter of 2020.) Even great companies can get drug down if the markets head south. In March of 2020, you could have purchased Tesla for $72, rather than today’s price of $449.67.
If there is any stumble at all in Tesla’s execution, then shareholders could rush for the exits – taking profits as fast as they can. This has happened many times with the company, with much of the volatility linked directly to Tesla‘s CEO Elon Musk.
Auto Sales in Recessions
The jump in EV sales in the 3rd quarter of 2020 might make you think we are out of the woods in the current recession. However, that would be a dangerous assumption, if it turns out not to be true. Auto sales struggle in recessions. When there is high unemployment, people can’t afford to buy a new car. In a speech on October 2, 2020, Federal Reserve Board chairman Jerome Powell said that a “broader measure” of the employment situation indicates that unemployment might be as high as 11%. Some folks don’t realize we’re in a recession, or are perhaps denying that the economy has suffered as much as it has, and are hoping that the election might fix things. Auto loan debt has been quite elevated for years, and is currently at $1.34 trillion. As I’ve indicated in many blogs, financial instability is a concern (this was a major concern of a new IMF blog as well). Debt was massive before the pandemic. See the chart below for details.
GM and Chrysler both had bankruptcies in 2009, after years of net losses. GM and Ford both saw sales/revenue slump by more than half in the 2nd quarter of this year. Toyota’s sales were down by 40%. Even Tesla’s sales sank 5% in the 2nd quarter of 2020. The 3rd quarter was much better for most auto manufacturers. That has more to do with borrowed time and money than to a robust economy and strong consumer.
With a market value of just $30 billion, a speculative bond rating and total liabilities of $225 billion, Ford might need to restructure its debt through a Chapter 11 bankruptcy. On Oct. 1, 2020, Ford announced major leadership changes, including a new CEO and CFO, effective immediately. That’s never a good sign, particularly in a recession, with all of the debt, pensions and other post-employment benefits (OPEBs) that Ford is grappling with. The former CEO of Ford, Jim Hackett, has been selling his Ford stock (another red flag). FYI: Ford was downgraded to junk in September of 2019 by Moody’s – before the pandemic.
Buying auto stock in a recession can be perilous to your fiscal health – particularly if you are buying high. Tesla’s 2nd quarter will be stellar and will definitely make headlines. However, the good news may already be priced into Tesla’s stock. In fact, if the company stumbles going forward, there could be a sell-off. The product has an outstanding record. It’s typically the CEO that gets into hot water. For the rest of the industry, legacy auto manufacturers will continue to lag the marketplace until they get a stronger foothold in the EV market. The exception to that is definitely Nio, which is seeing sales soar in China.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
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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. The 4th edition, updated to include the COVID-19 Recession, will be released soon.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. 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.