I just finished reading an article about why Tesla (NASDAQ:TSLA) should start financing cars.
While the thought of an unprofitable company financing cars might seem like a crazy idea, the contrarian in me thinks the move, which would bring Tesla closer to full vertical integration, could help boost TSLA stock, not hinder it. Vertical integration is defined by Investopedia as “a strategy whereby a company owns or controls its suppliers, distributors, or retail locations.”
Nio Is a Great Example
Nio (NYSE:NIO),the Chinese maker of electric SUVs, had so much promise when it went public in September 2018, raising $1.15 billion from outside investors at an IPO price of $6.26 per share. Yesterday NIO stock closed at $1.32.
At the end of July, I suggested that,trading under $3.50, Nio was a buy for aggressive investors. Despite the possibility that it would go bankrupt, I felt like the risk/reward ratio of Nio stock had finally become positive.
On September 24, Nio reported that it had lost 45-cents per share in the second quarter, significantly worse than the consensus estimate of an 18-cent per share loss. Nio stock tumbled on the news.
What’s this got to do with Tesla and the financing of cars?
Vertical integration.
For all the bells and whistles of Nio’s technology, the company doesn’t even manufacture its own vehicles. As Bloomberg recently noted, it’s odd that Nio is losing so much money when it hasn’t forked out the capital for its own manufacturing facility.
“What’s most striking is that NIO is racking up these massive losses in spite of a business model that in theory ought to be far more efficient than conventional carmaking,” stated Bloomberg Opinion contributor David Ficking.
The Retreat of Tesla Stock
Companies that are trying to get car and truck buyers to move from one paradigm (combustion engines) to another (electric), have to provide customers with an experience that’s heads above the existing competition.
Tesla’s learned the hard way that putting the Tesla nameplate on a vehicle doesn’t necessarily mean that consumers are going to buy into the fanfare.
Elon Musk debated whether the cost of the company’s stores was worthwhile at this stage. I defended the company’s decision to close all of its stores in March because I thought consumers would embrace the move. But TSLA wisely decided that it would keep half its stores open and raise the prices on its vehicles 3% to cover the cost of operating its stores.
What I failed to consider in March was how important vertical integration is to selling electric vehicles. The more consumers feel connected to and engaged in all aspects of Tesla’s business, the more likely they are to spend their money on the company’s vehicles.
Nio is learning the hard way that it isn’t easy selling electric vehicles in today’s high-tech world. The owners of Tesla stock should welcome anything TSLA can do to make it easier to sell its vehicles,
The Bottom Line on TSLA Stock
Clean Technica contributor Jennifer Sensiba argued in her article about TSLA entering car financing that the relatively low total cost of owning a Tesla vehicle isn’t taken into consideration by banks that consider auto loan applications.
“There’s definitely one big obstacle that’s likely keeping many from choosing the Tesla: financing. Even with excellent credit, there are people who could really afford the Tesla but can’t get into one because the bank says NO,” Sensiba wrote in an article published on Sept. 29.
She explained that banks ignore the high cost of using gas guzzlers, compared with Tesla vehicles. As a result, some buyers receive loans to buy gas guzzlers but can’t get loans that would enable them to buy Teslas.
Also, Sensiba discusses how data collected by Tesla’s vehicles can be used to provide insurance at lower prices to customers.
By adding services such as insurance and financing, along with its company-owned store network (as opposed to traditional franchised dealerships), Tesla could become even more vertically integrated than its bigger rivals.
From where I sit, that would be great news for TSLA stock.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
