Tesla (NASDAQ: TSLA) is a well known company that burns through cash like… well, like it’s building a new tomorrow. But with a potential recession looming, this could spell danger for the electric car maker.
Unfortunately, cars are one of the first things that people stop buying in a recession, and in particular luxury vehicles — such as $50,000 Model 3’s. For example, during the 2008 crash, BMW saw a 17% drop in sales and made zero profit during that time. But with a company that keeps on pushing boundaries, should investors be worried about Tesla’s prospects if we enter another recession?
Tesla has stated that its cash position of $6.3 billion at the end of 2019 is sufficient to weather an extended period of uncertainty. The question remains then, what will happen when this pandemic passes and there is still a recession to contend with?
Its Q1 earnings report showed 88,400 cars sold over the period which was followed by a reported 90,650 deliveries in Q2. This is higher than expected and Tesla’s stock price has soared as a result sitting at a market cap of around $300 billion. Whilst these numbers are extremely positive and its stock remains up more than 330% YTD, this does not guarantee a profit at its earnings call this evening. Q2 saw some recovery in Europe and the U.S. , but Tesla was forced to reduce its prices and factories were closed for several weeks, which could have a huge impact on the revenue needed for surviving a prolonged downturn.
The company also has a large amount of debt, with just over $4 billion in bonds and credit agreements of which a large proportion will mature between 2021 and 2023. With a looming recession that could slash the number of sales this year on top of a difficult Q2 due to COVID-19, Tesla will find it difficult to maintain a sufficient cash flow for continued production whilst also dealing with the debt build-up.
Overall though, Tesla’s revenues have been growing steadily at 1% year over year, with sequential growth of 20%. In addition, it reported its first profitable year since its 2010 IPO and is on the verge of joining the S&P 500 (NYSEARCA: VOO). Despite running into a few difficulties in 2018, Tesla’s much-publicized cash problems are generally hype and its potential is unvalued by its many critics. As for the recent economic downturn, Tesla has fared quite well. Despite stock prices falling from $900 to $360 over the market freefall in February/March, Tesla is now hitting all-time highs of $1,500+ for fun. Definitive proof that it is well able to weather uncertain times.
A changing world
Tesla is a company that is trying to change the world with its innovation and renewable energy products. However, with EV’s only sharing 2.2% of the overall car market, it is a vulnerable area to be invested in during the pandemic and during a possible recession.
The looming recession will only serve to deepen the global decline in car sales. Over the past year, there was a 4% drop in sales and many are starting to question if car sales have reached their peak. Tesla will be hard-pressed to increase its revenue and keep investors happy when a recession could rip a hole in the center of an already declining automobile industry.
Additionally, global oil prices fell hard earlier this year, and though they have now largely recovered, who’s to say they won’t fall again as resources dry up? On the other hand, EVs are gaining popularity as prices for the expensive batteries in them have declined more than 70% over the last decade, thus the prices of the cars themselves.
Should a similar resurgance in cases as is happening in the U.S. happen in oil-producing countries, technical difficulties can increase the likelihood of resource losses, such as has happened in Venezuela earlier this year. In addition to the eventual depletion of oil, which scientists predict will happen by 2052, Tesla could see an increased presence on the minds of investors as they look for alternatives in the automobile industry.
With almost 2 decades of skin in the game and despite competition from other motor vehicle companies such as General Motors (NYSE: GM) and Ford (NYSE: F) in recent years, Tesla is still the biggest name in electric-powered cars. Beyond recent events and beyond a recession it could well be the new beacon around which future car investors flock.
Tesla will report its Q2 earnings today, July 22 after the bell, where analysts expect it to declare revenue of between $5.1 and $5.4 billion.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Ford and Tesla. Read our full disclosure policy here.
Contributing Writer at MyWallSt
Poppy likes companies that go the extra mile. Her favorite stock is Amazon because she is fond of its innovation, variety, and creative solutions to sustainability.