I’ve been pretty hard on Tesla (NASDAQ: TSLA) as an investment over the years. As I’ve said many times, I have nothing against Tesla as a company. I think it has been a huge success story as a luxury vehicle maker and an electric vehicle pioneer. So, I won’t dwell on all the things about TSLA stock that make it a dangerous investment. I’m going to focus this article on two potential silver linings for Tesla in the Covid-19 economic downturn.
I won’t argue for a minute that the imminent recession is good overall for Tesla’s business. Given TSLA stock is down nearly 23% since Feb. 19, it seems the market understands that point. But there are at least two ways Tesla could benefit from the downturn.
Covid-19 Will Distract Tesla’s Competitors
Tesla has opened up a big lead in the EV market over legacy automakers like General Motors (NYSE: GM) and Ford (NYSE: F). The million-dollar question for investors is, will Tesla be able to fend off the competition? By the way, those competitors have tremendous advantages in scale and resources. Ford, GM and others may have not taken the EV revolution as seriously as they should have in years past. But the global auto industry has gone all-in on EV investments in the past couple of years.
One of the bear arguments against Tesla’s fundamental outlook is that it will not handle the tsunami of coming competition well. That argument could be especially true given companies like GM have the cash flow to handle selling EVs at a loss to gain market share.
The first silver lining to the coronavirus disruption for Tesla is that it may distract Tesla’s competitors from their focus on EV investments.
“The further along other competitive EV programs get pushed out, the more Tesla will, in our view, be able to extend its competitive edge in electrification from the perspective of the consumer,” Morgan Stanley analyst Adam Jonas says.
The window of opportunity for Tesla to run virtually unopposed in the EV market was closing. Now, Covid-19 may have jammed a stick in that window to keep it open for a little bit longer.
Auto Stimulus Could Help Tesla More Than Others
Back in 2009, one of the most popular government stimulus programs was the “Cash for Clunkers” program. Under the program, owners of vehicles that got less than 18 miles per gallon traded in those vehicles for more fuel-efficient ones and received kickbacks.
Today, there is a massive number of jobs at stake in the U.S. auto industry. Not to mention the fact that so many of those jobs are in critical political swing states. Washington may soon focus on some form of major stimulus aimed specifically at the auto industry.
In fact, Ford’s vice president of U.S. marketing recently said the company is already in discussions about the “most appropriate” form of stimulus.
Of course, the auto industry has already benefited from the massive $2.3 trillion stimulus package, which provides loans for companies in need. But the auto company most in need of financial support that will benefit the most from free government money is Tesla. Access to capital has been one of the biggest debates between Tesla bulls and bears in recent years. Even Tesla CEO Elon Musk said the company was within “weeks” of bankruptcy due to its dire financial situation back in 2018.
Tesla once again raised capital earlier this year. For now, at least, it seems Tesla will have no problem getting all the loans it needs in the near term no matter how much cash it burns.
In addition, the government would likely incentivize a potential Cash for Clunkers 2.0 based on fuel efficiency. Depending on how Congress structures the stimulus, Tesla’s EVs could certainly disproportionately benefit.
How to Play TSLA Stock
I’ve already laid out the reasons why the Covid-19 economic shutdown could be good for Tesla. But I still say investors shouldn’t be buying TSLA stock. The valuation is absurd compared to both auto peers and high-growth tech peers.
Jonas explained the valuation situation in a downgrade note earlier this year.
“In our view, the current valuation discounts a fundamental scenario [that], while possible, skews much closer to a bull case than a base case,” Jonas said.
In other words, Jonas said TSLA stock already priced in the bull case. He wrote that note on Jan. 16 when Tesla shares were trading at $518. Since that time, there was a global pandemic that shut down the entire economy. It sent the auto market reeling and ended the 11-year-old bull market. Today, after all those developments, TSLA is trading at $568.
Don’t try to make sense of it. I’ve said repeatedly that too many investors of TSLA stock are crazy. They will buy the stock at any price under any conditions. The past couple of months have proven that case perfectly. Tesla is disconnected from reality and will remain so indefinitely. If you’re looking to buy the market dip, look elsewhere.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long GM stock.
