Whether you’re a believer or a critic, the one consensus that most people have toward Tesla (NASDAQ:TSLA) is that its innovative prowess has never been a question. However, what has prevented many investors from having full confidence in TSLA stock is Tesla CEO Elon Musk. While clearly an exceptional human being, he has also demonstrated erratic behavior that you wouldn’t expect from a chief executive.
Nevertheless, TSLA stock has enjoyed a dramatic burst of bullishness over the last several months. First, shares jumped toward all-time highs when U.S.-China relations started to cool amid an escalating trade war, eventually leading to a phase one trade agreement. Second, Tesla recovered very quickly and impressively off its lows of this year in March.
Personally, I’ve grown to appreciate the underlying electric vehicle business, especially as the novel coronavirus wreaked havoc on global markets. Previously, I criticized EVs, mainly for the U.S. not having the infrastructure to support vehicle platforms outside the combustion paradigm. However, the oil price war between Saudi Arabia and Russia helped change my perspective.
Because of the economic crisis that the Covid-19 pandemic caused, the price war wasn’t all that it was cracked up to be. As I’ve argued before, you can cut production to zero – if people aren’t driving, it won’t change the demand picture.
But the specter of another international pricing conflict could devastate a fragile economic recovery. In turn, this would cripple many high-paying American jobs.
On the other hand, Tesla has proven that with EVs, we are truly self-sufficient. We support EV power sources through domestic lithium mining and can innovate this platform at home. Essentially, TSLA stock is an investment of national importance.
Bad Timing Hurts TSLA Stock
Another factor that supports the bullish case for Tesla is the EV’s simplicity relative to traditional combustion-based cars. According to a Goldman Sachs study, traditional cars require approximately 30,000 components, whereas EVs typically need only 11,000 parts.
One of my arguments for buying cars with a manual transmission is that you have fewer moving parts that can go wrong. Here, EVs take this concept to the next level because the entire platform is inherently simpler.
That’s one of the underappreciated factors contributing to the success of TSLA stock. Basically, Tesla can troll competitors like General Motors (NYSE:GM) or Toyota (NYSE:TM) because the former can theoretically churn out incredible vehicles with less taxing research and development endeavors.
And this narrative would have worked wonders were it not for the coronavirus.
Unfortunately, not even a great innovator like Tesla can overcome mass-scale economic concerns. In my opinion, the biggest current threat to TSLA stock is the paradigm shift in consumer behavior. According to the U.S. Bureau of Economic Analysis, the personal saving rate hit 33%. This is the highest rate by far since the government kept records.
To summarize the implications, consumers are hoarding cash and penny pinching whenever possible, not knowing what tomorrow brings. Frankly, this is smart and logical. But it’s also a recovery killer because most of our economy is based on consumption.
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This is especially true for the automotive industry. Between 1976 through April of 2020, the correlation coefficient between the personal saving rate and total vehicle sales (in units) is -55%. Stated differently, a decently strong inverse relationship exists between consumer savings and car purchases. As savings goes up, auto sales generally decline.
With savings at a record-shattering rate, this is a terrible market for cars, EVs or otherwise.
Rental Car Bankruptcies Are a Thorn for Tesla
Undoubtedly, one of the shocking – though not necessarily surprising – news items during this pandemic was the bankruptcy of Hertz Global (NYSE:HTZ). An already deeply troubled company, the coronavirus represented the final straw.
While the bankruptcy itself isn’t a threat to TSLA stock, Hertz’s massive fleet of rental cars is. Not only that, companies like Avis Budget Group (NASDAQ:CAR) must substantially downsize operations if they hope to survive, given the plummeting of air travel. In both these cases, we’ll see a flood of cars hitting the secondhand market.
If that wasn’t bad enough for Tesla, gas prices have dropped significantly. Therefore, from an initial and ongoing cost perspective, the financial incentive to own a Tesla EV has likewise declined.
While bulls will celebrate the long-term thesis for TSLA stock, I think the immediate case isn’t too rosy. With several factors almost conspiring against Tesla, it’s probably better to wait out for a possible discount.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
