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  • Tesla has been known to defy the odds.

  • Tesla has defied all laws of probability.

  • It's incredible the seemingly turnaround out of nowhere that they've

  • pulled off despite all of its issues around Elon's behavior.

  • This company is fundamentally changing how people move around.

  • But now it may face its biggest challenge yet as coronavirus crushes

  • the global economy. In the U.S., GDP retracted at a rate of 4.8

  • percent in the first quarter of 2020, and the Federal Reserve warned

  • the second quarter could be even uglier.

  • We're going to see economic data for the second quarter that's worse

  • than any data we've seen for the economy.

  • More than 33 million people have filed for unemployment since March,

  • which means that at least 33 million people will most likely not be

  • buying a new car anytime soon.

  • Anytime there's a con traction to consumer confidence, consumer

  • spending, automobiles are one of the first things to take a big hit.

  • And the pandemic has shut down production for all U.S.

  • automakers. Tesla CEO Elon Musk clearly feels the pressure.

  • BLEEP. Outrage, outrage.

  • This frustration is boiling over when you have that much asset

  • concentration in one factory, it's producing 70 percent of your

  • vehicles. This shutdown is really crippling.

  • So how can the electric carmaker get through this economic standstill?

  • Here's a look at why some experts say Tesla may be better position

  • than other U.S. automakers to survive.

  • Tesla was founded in 2003, so it already survived the Great Recession,

  • but it was different times for the then private company.

  • In 2008, it was just starting to deliver its first car, the Roadster.

  • The luxury market actually typically offers better than the mainstream

  • brands because people with discretionary spending money can continue

  • to purchase a new vehicle.

  • Meanwhile, the big three were getting a bailout in the midst of a

  • financial crisis and a recession.

  • Allowing the U.S. auto industry to collapse is not a responsible

  • course of action. The bailout of the auto industry back in 08', 09'

  • was considered very necessary because it saved thousands

  • upon thousands of jobs.

  • So if you allow GM, Ford, Chrysler to go

  • bankrupt and fail, it would have a ripple effect across the entire

  • U.S. economy. Prior to the Great Recession, a lot of automakers kind

  • of got into some hot water because they were overproducing.

  • There were some automakers that were just selling cars just to sell

  • cars just to satisfy these production contracts.

  • And of course, that's not really a great way to do business.

  • So when the Great Recession came along, all of that essentially

  • collapsed. Tesla on the other hand, never really had that problem.

  • The industry is in a much better position to deal with an economic

  • downturn now than it was then, simply because it doesn't go in

  • already being well over capacity and having a lot of inefficient

  • production issues.

  • And I think Tesla was probably never really at risk of those issues

  • because they've been a relatively small volume maker.

  • I think it's much easier for Tesla to quickly moderate and modulate

  • its production capacity during a downturn.

  • He's got the flexibility to add a tent, which means he's got the

  • flexibility to remove a tent when necessary.

  • But this downturn is unlike anything that has happened before.

  • And the timeline for the recovery is still unclear in terms of like

  • some of the big events that people have compared it to, things like

  • 9/11. There is an immediate recovery the month after 9/11 in October.

  • We had the highest seasonally adjusted annual rate of the automotive

  • industry ever. And then when we look at the recession, it took years

  • to recover from that.

  • It was such a slow recovery that this doesn't feel like it's the same

  • either again. So people keep wanting to draw parallels, but just

  • haven't seen a good line in terms of like where this actually falls

  • in the spectrum. What's been fascinating about this particular

  • circumstance is that the car industry, as well as the economy in

  • general, was doing very well.

  • It's been doing well over the last few years, selling about 17

  • million new cars a year, which is a very high number.

  • So the shift in momentum, unlike the previous economic downturn, that

  • happened relatively quick in most people's opinions.

  • So that's a big difference from the last time around.

  • And while a specific bailout for the auto industry is not part of the

  • two trillion dollar coronavirus relief package, nothing is off the

  • table yet. There's already talk of doing a very specific automotive

  • financial assistance program from the government.

  • 12 years ago, we had the cash for Clunkers.

  • There's talk of doing the same thing coming out of this.

  • And I think the automakers might be very much dependent on that to

  • keep them financially stable.

  • We don't necessarily see it for Tesla.

  • We don't think they're going to need it.

  • But for for the Detroit three, we see a high risk of another bailout,

  • the worst month in decades in terms of auto sales in April.

  • We think this weakness and new vehicle sales is going to last for some

  • time. So it's going to get ugly.

  • For an idea of whether Tesla is financially stable enough to get

  • through this, let's look at its first quarter earnings.

  • All of the major automakers had a rough first quarter, but Tesla was

  • able to eke out a 16 million dollar profit propelled by strong demand

  • for its Model 3.

  • This surprised some investors.

  • It was a much better than expected quarter.

  • Their automotive gross margins, most importantly, were very strong,

  • about 25 percent for the quarter.

  • So they're really improving the profitability of the auto business.

  • A lot of that reflects the new factory in China, which started up

  • late last year and is still in the ramp up phase.

  • But that really helped their automotive margin for the quarter.

  • Tesla said it delivered around 88,400 cars in Q1, including the first

  • deliveries of its highly anticipated Model Y crossover SUV.

  • Tesla didn't necessarily deliver as many vehicles as we perhaps

  • thought that they could.

  • This was gonna be their big celebration quarter.

  • They had just got online in China, in Shanghai.

  • It's just starting to produce the Model Y at a much earlier pace than

  • anyone expected.

  • It would have been a really great success story for them, if not for

  • the global events that completely overshadowed everything that they

  • had going on in Q1.

  • Tesla reported $8.1 billion dollars in cash flow, It has a

  • balance sheet that on paper can survive six months of a shutdown.

  • But in practice, GM, if we're if we shut the economy down for that

  • lie, we all know the narrative is very dark at that point.

  • If you look at the $8.1 billion of cash, if you go back 12

  • months, they had less than three billion of cash a year ago.

  • So they've generated significant amount of free cash flow over the

  • last four or five quarters.

  • They also did an equity offering in February.

  • That's also helped their their cash balance.

  • Musk raised two billion dollars in a stock offering before the

  • epidemic in China expanded into a global pandemic.

  • They group them as the tech company.

  • But at the end of the day, they build and sell vehicles.

  • And that is a very capital intensive industry.

  • And unlike GM, Ford and Chrysler, which are actually trying to ramp

  • down production and closed plants, Tesla is in the process of

  • building that up. So they have to spend a lot of money and they're

  • doing it very quickly.

  • The way they got their China plant up and running was remarkable how

  • quickly they're able to do that.

  • And I think they're looking to do the same thing over in Germany with

  • their new Gigafactory.

  • So the spending is a worry for Tesla.

  • We think the most prudent thing they could do here would be to do

  • another equity offering, because it's not clear how long this

  • downturn would last.

  • This new factory in Germany is going to be about twice as expensive

  • to build as the new China factory.

  • And they've got it to spending roughly three billion a year in

  • capital expenditures over the next three years.

  • They're going to be spending a lot more than they have in the past.

  • Tesla's got a certain amount of capital, but they're not necessarily

  • profitable. So they're burning capital and losing money even when

  • everything's running normally.

  • They're going to burn through that much quicker if their sales drop

  • off. But you saw the numbers that we just got for Q1 sales from

  • Tesla, and they were very strong.

  • So it's indicating that, again, they were able to be somewhat

  • resilient. I would see Tesla having as much or more chance to get

  • through this difficult timeframe than any of their competitors or any

  • of the domestic automakers.

  • Tesla stock has been a wild ride for investors, but some think it does

  • put Tesla in a better position than other automakers and could be a

  • lifeline. Their most valuable currency is the stock so they can

  • always do equity offering.

  • They've found no shortage of willingness on the part of investors to

  • fund the company. They looked very highly upon when it comes to Wall

  • Street and I don't think anyone's really going to let them fail.

  • Tesla trades at roughly 10 times the earnings multiples as a General

  • Motors or Ford or Fiat Chrysler.

  • Tesla's market cap exceeds those three automakers combined, which is

  • fairly unbelievable considering that its annual vehicle sales are a

  • fraction of those companies.

  • But some are concerned that Elon Musk's tweets could get the company

  • in trouble again. Last week, he tweeted that he thought Tesla's stock

  • price was too high.

  • Stock now down almost seven percent.

  • It was around 750 when he tweeted that the stock was too

  • high. Now it's at around 725.

  • You're going to come out and say, my stock that I own is too high.

  • That's harm to the shareholders.

  • That specifically is what the S.E.C.

  • had issue with the first time around.

  • Exactly. We attribute a lot of Tesla's success and the stellar

  • quarters that they've had over the last three quarters to Elon Musk

  • being a lot more focused, spending a lot less time on social media.

  • And he's he's really delivered.

  • So the erratic behavior really concerns us.

  • We don't think that tweet is the end of the story.

  • That will be forthcoming regulatory and perhaps some legal action

  • from shareholders. The biggest test for Tesla will be the second

  • quarter, which is expected to be much worse.

  • Tesla's main U.S. car plant in Fremont, California, had to suspend

  • operations on March 24th due to public health orders.

  • It was able to reopen limited operations.

  • But when the plant can be up and running at full capacity is still

  • unknown. Tesla survived actually longer than many when was keeping

  • production going in the US.

  • It's going on a state by state basis.

  • So when they can actually reopen or when other automakers can reopen,

  • it's still up in the air. And unlike the Detroit automakers, Tesla

  • doesn't necessarily have to get approval from the United Auto Workers

  • to go back to work. So they could probably restart, possibly a little

  • bit quicker than someone like the traditional Detroit automakers.

  • The company also suspended production temporarily at its battery plant

  • outside of Reno, Nevada, and at its facility in Buffalo, New York,

  • where it makes components for its batteries and its charging stations

  • along with some solar products.

  • Impacts of these shutdowns are expected to hit Tesla's balance sheet

  • fully in the second quarter of 2020.

  • The company has already implemented furloughs and pay cuts and ceased

  • all but essential contractor and temp assignments.

  • Tesla ran into hurdles when it tried to open its plant up before

  • shelter in place restrictions were lifted.

  • This is fascist. This is not democratic.

  • This is not a freedom.

  • Give people back their God damn freedom.

  • Its new Shanghai factory only closed for about two weeks in February

  • due to the pandemic. It looks like China might be through this

  • challenge sooner than other parts of the planet.

  • And Tesla will be positioned well to take advantage of that.

  • Tesla sold over 10,000 vehicles in China in March, its highest ever

  • monthly sales in the world's largest auto market.

  • But the bulk of Tesla's revenue still comes from the U.S.

  • Auto data, which crunches monthly auto sales, says the pace of auto

  • sales in April at 8.6 million vehicles was the lowest monthly sales

  • rate since the firm started calculating the data in 1980.

  • If we look at the traditional automakers, General Motors and Ford,

  • they're just trying to get through this period.

  • One thing that they are offering are generous incentives for

  • consumers. People at this point are very hesitant to buy, and many of

  • them are offering programs like zero percent financing for 84 months,

  • which is amazing.

  • And Tesla is a bit different.

  • I mean, they never want to really offer incentives.

  • Clearly, their retail model is different from that in the direct

  • selling. So that could kind of help them perhaps get through this a

  • little bit better. Despite coronavirus related business disruptions,

  • Tesla said it was able to sell cars online and deliver them to

  • customers with a contactless delivery option.

  • Throughout the U.S., they are facing a lot of the same problems of a

  • shortage of customers.

  • People don't necessarily want to spend money for a car.

  • Tesla vehicles, as everyone knows, are not exactly cheap vehicles.

  • So that's going to be an issue for them as well.

  • I mean, I think one thing they have going for them is that they have

  • a really passionate consumer base.

  • And a lot of those consumers in terms of demographics, skew a bit

  • wealthier. So I think that is going to help them.

  • And when you look at the long term game, which is what they're in for