Why Is Tesla Up 90% YTD, While Mainstream Autos Are Down 40%?

by Trefis Team
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Major automotive and auto component manufacturers have seen their stock prices crash, due to the coronavirus pandemic. People really don’t need to drive much right now, and not many are buying new cars either. While General Motors stock (NYSE:GM) is down by about -38% year-to-date, Ford (NYSE:F) is down by -43%. However, Tesla stock (NASDAQ:TSLA) has bucked the trend, rising by almost 90% year-to-date. The rally in Tesla stock is interesting, given that the company is viewed as a more speculative bet compared to mainstream automotive names. Below, we take a look at some of the trends that could be driving Tesla’s rally and also look at the risks the company faces.

As part of our theme: Autos Fight COVID-19, we further discuss our analysis of the recent performance of key automotive stocks, the survival risks the key auto names face, and the potential downside.

Potential Reasons For The Rally

  • Mainstream automakers have been investing heavily to pivot to electric vehicles, and the disruption caused by the coronavirus could make this shift harder, as they need to navigate a collapse in sales and significant near-term financial pressures. While Tesla, too, is facing interruptions, the pandemic could help the company widen its lead as the industry transitions to EVs.
  • Tesla’s Chinese business has been faring well, driven by production at its Shanghai factory. The company posted its best-ever month in China, delivering 10,160 vehicles in March. In comparison, overall auto sales in China plunged 43% year-over-year for March. This could be providing investors some confidence that the Chinese market will provide a floor to Tesla’s performance through the pandemic.
  • The markets could also be assigning an increasing value to Tesla as a software and AI company, considering its sizeable lead in the self-driving space. (Related: Just How Far Ahead Is Tesla In The Self-Driving Race?)  We estimated Tesla’s software sales at about $1.5 billion last year.
  • Separately, the broader markets have been betting on a quick economic recovery post the pandemic. The S&P 500 has rallied by close to 30% from its March lows, driven by the U.S. government’s aggressive stimulus, and it’s likely that Tesla will be a key beneficiary if the economy improves, given its strong line-up of vehicles including the Model 3 and Model Y compact SUV.

Tesla Still Faces Significant Risks

  • Tesla is likely to face significant near-term revenue pressure. There is little reason for people to buy cars right now and discretionary spending is also likely to drop as the economy slips into a recession, hurting demand for Tesla’s pricey vehicles.
  • Production at Tesla’s Fremont facility, which accounts for about three-quarters of its annual capacity remains suspended and the company’s plans of restarting operations in early May look unrealistic.  Even if the facility is able to resume production in the near-term, it could take time to efficiently ramp production as it may need to work with new norms such as social distancing.
  • Tesla stock faces significant valuation risk. The company trades at a P/S multiple of about 6x, compared to GM which trades at about 0.3x, based on trailing revenues. This means that the stock could react more strongly to negative news compared to its peers.
  • There is a possibility that the sharp decline in crude oil prices to their lowest levels in decades could slow the shift towards electric vehicles, as the running costs for gasoline vehicles plummets.

Could the above risks cause Tesla stock to fall to levels of $130? View our dashboard analysis on Tesla’s downside, for more details and numbers on how this could happen.

See all Trefis Price Estimates and Download Trefis Data here

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