Tesla took the seemingly dire step of closing a car factory in Fremont, Calif., and a solar panel plant in Buffalo this week because of the coronavirus epidemic.
But despite its immediate struggles, many analysts consider the company’s long-term outlook to be surprisingly good. On March 19, just after announcing the closures, Morgan Stanley even went so far as to upgrade its rating on Tesla’s stock to the equivalent of a “hold,” from its equivalent of a “sell.” That’s largely because the stock has fallen to a more attractive price, but also because Morgan’s analysts, like some other observers, think the electric carmaker is well-positioned to navigate choppy waters.
Here’s why:
Wheels on the Ground
Obviously, Tesla’s Fremont plant closure will have a significant impact on business: The factory is the company’s biggest car producer. Morgan Stanley assumes the shutdown will last a month and reduce Tesla’s annual car deliveries by 30,000 in 2020 to 420,000 cars. That would still be a substantial increase from Tesla’s 2019 delivery of 367,000 vehicles, but still well short of its own prediction that this year’s production would “comfortably exceed 500,000 units.”
Then there’s the demand question. Morgan Stanley’s analysis accepts Tesla’s claims that it has so many eager buyers, it can sell every car it produces. But there’s reason to question that assumption. Even before COVID-19 crashed the auto market, Tesla was facing headwinds like expiring tax credits for electric vehicles and rising competition.
And no one can predict with certainty the depth or length of the recession that is unfolding. It’s possible that the downturn in new car purchases, which has already begun, lasts two weeks, but it’s also possible it lasts four months. For the first time, Tesla could even wind up producing more cars than it can sell.
“If the industry takes a dive as a whole, people aren’t going to be running to spend money on a Tesla,” says Alyssa Altman, lead transportation analyst for Publicis Sapient, which does not have a financial position in Tesla.
Money in the Bank
But that worst-case scenario actually points to why Tesla is ultimately so well-positioned: It’s sitting on a massive cash reserve.
Above all, Tesla’s decision to raise an extra $2.3 billion from new stock sales in February is looking clairvoyant. That stock sold on Feb. 12 for $767.29 per share, then peaked just a week later at $917.42. Anxiety about the coronavirus in China, then the rest of the world, has driven the stock back down to $505 on Wednesday.
But Tesla still gets to keep the $2.3 billion, pushing its total cash reserves to a whopping $8.6 billion. In a recent SEC filing, Tesla also said it has approximately $3 billion in available lines of credit.
Tesla has some large outstanding obligations, which Pierre Ferragu of New Street Research estimates includes $2 billion in committed investment for factories in Shanghai and Berlin, and $1.5 billion in payments to suppliers. But even accounting for that money, at $600 million per quarter in net spending, Ferragu thinks Tesla can operate for 15 months without further investment.
While there are some restrictions on that $3 billion in credit, Tesla could extend the runway even further. On the other hand, declining demand could increase Tesla’s estimated cash burn. But there’s still a good chance Tesla’s runway is long enough to outlast the worst stretch of even a serious recession, then return to growth.
The Long After
Under CEO Elon Musk, Tesla has methodically, if somewhat theatrically, built a retail market for electric vehicles and taken a dominant position therein. An average recession wouldn’t likely derail that success. But if COVID-19 creates greater economic damage, the narrative could be drastically altered—for worse or for better.
As Morgan Stanley highlighted in a separate March 11 report, the oil market is one clear threat. With help from a price war between oil-producing giants Saudi Arabia and Russia, the coronavirus has triggered the sharpest drop in oil prices in memory. Altman believes that lasting global transformations from the coronavirus, such as shortened supply chains for manufactured goods, will keep those prices low. Cheaper gasoline could make drivers less likely to buy an EV, because it lowers the cost of owning an internal-combustion vehicle.
However, Morgan Stanley’s analysts say this is not a serious threat, because the next “burst” in EV adoption will be from large fleets going electric, with consumer adoption taking a back seat. And Altman says consumer thinking about EVs is less driven by gas costs than it was a decade ago, and more about charging infrastructure—an area where Tesla’s sophisticated and exclusive Supercharger system has an advantage over competitors.
Another risk is the impact a serious downturn could have on government initiatives that have been crucial to Tesla’s growth. If a serious recession pressures government budgets, cuts could threaten generous incentives given to EV buyers in countries from Germany to South Korea. The cuts would dampen sales and slow their return in a recovery, putting Tesla further away from the goal of producing Model 3s and Model Ys at the large scale necessary for sustained profits.
Altman, however, predicts quite the opposite. “The push to rebuild infrastructure is going to be renewed after this,” she says. “There’s a huge opportunity to think differently about how people move around.”
That could mean large new government initiatives to support EV-charging networks, battery research, or even increasing direct subsidies. Coronavirus recovery stimulus could be tied to such decarbonizing efforts, as proposed by liberal think tank Data for Progress. While politically unlikely in the present-day U.S., leadership changes or similar initiatives globally could set the stage for a truly electric recovery—for Tesla and the rest of the economy.
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