As the Dow drops, why is TSLA taking off?

The stock market is struggling, and that’s no surprise, with a global pandemic causing unprecedented uncertainty and a recession looming. But even as the broader market has been slipping, or at best eking out minor gains from one day to the next, TSLA stock has taken off like a rocket. What gives?

Above: Tesla's Model 3 (Source: EVANNEX; Photo by: Casey Murphy)

There has been a spate of positive news items lately, from record sales in China to Elon Musk’s predictions that Tesla’s Robotaxi network should launch later this year. However, these have been counterbalanced by negative developments—Tesla has had to furlough sales staff and ask landlords to reduce rents. There’s something else behind the stock surge.

The global pandemic is having a devastating effect on the auto industry, and no one doubts that the final damage report will make sad reading. However, a growing number of EV industry pundits and stock analysts believe that, in the medium term, Tesla may take less harm from the disaster than the legacy automakers.

Many have speculated that the global nightmare we’re living through may have a silver (or green) lining. As road traffic has all but disappeared, the skies above major cities have cleared, and it may just occur to people that there’s a way to make that positive change permanent. I sincerely hope this happens, and I’m confident that, in the long run, it will. However, in the short term, it’s becoming apparent that the pandemic will be a setback for vehicle electrification.

Authorities in Europe and China are already talking about relaxing emissions regulations in order to boost auto sales. In the US, the federal government has used the crisis as an excuse to suspend enforcement of environmental laws across the board, and is considering a wide range of giveaways to fossil fuel industries. Automakers will soon be getting a pot of money from the government, and this time, the package is unlikely to include even the modest goads to greenery that the 2008 TARP program did.

Even with the bailout money, the automakers will be in survival mode for months, if not years, and it will be a miracle if the ambitious electrification plans recently announced by GM and Ford remain intact. In fact, launch dates for a couple of new EVs have already been pushed back. Ludicrously low gas prices, which are likely to be the new normal, provide yet another incentive for the legacy brands to prioritize their profitable gas-guzzlers, and quietly move EVs to the back burners.

In short, Detroit’s electrification efforts face a perfect storm. Meanwhile, the one automaker that makes only EVs is going to keep on (Cyber) trucking. Model Y, which many expect to be Tesla’s most popular vehicle to date, is already in delivery mode, and it’s plain that the company intends to get US production lines cranked up to full speed as quickly as is consistent with ensuring its employees’ safety. By most estimates, the legacy automakers are already about five years behind Tesla, and by the time they get back to producing EVs, they may find that the upstart’s lead has widened.

Above: Ark Invest Analyst Tasha Keeney talks Tesla (YouTube: Livewire Markets)

Several stock analysts have articulated this argument, and that’s what’s really goosing the stock price.

Credit Suisse analyst Dan Levy raised his recommendation for TSLA from Sell to Hold, and said that the California carmaker “competitively has more edge in the transition to EV as coronavirus disruption will make it more difficult for legacy automakers to balance the long-term shift to EV in the face of near-term cycle disruption.”

Goldman Sachs analyst Mark Delaney gave Tesla a Buy rating, saying, “We are positive on Tesla because we believe that the company has a significant product lead in EVs, which is a market where we expect long-term secular growth.” He also noted Tesla’s early-mover advantage, powerful brand and vertical integration.

Of course, the Tesla-widens-its-lead narrative depends on a couple of assumptions about the future, which is currently unpredictable enough to make fools of us all.

First, we’re assuming that Tesla has enough cash on hand to get it through the current factory shutdown more or less intact. The company says it has the chips, and the stock market obviously agrees, but if some unforeseen circumstance prevents Tesla’s US facilities from reopening in early May as planned, all bets could be off.

Second, we’re assuming that demand for Tesla’s vehicles stays strong. The signs from China are encouraging, but again, that fortune cookie could crumble. What about global demand? That’s where the “green lining” scenario I mentioned above comes in. Despite what many in business and politics would like you to believe, things aren’t going to “go back to normal”—history may repeat itself, but it doesn’t move backwards. When the crisis passes, thoughtful people will be wondering if it’s time to make some changes to their lifestyles. As Julio Vincent Gambuto wrote in a thought-provoking article, “If we want cleaner air, we can make it happen.” The realization that cleaner urban air might just reduce the severity of future attacks from airborne viruses will make some affluent car buyers more likely to consider going electric. Will this counterbalance the overall drop in car sales resulting from an apparently-inevitable recession?

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Written by: Charles Morris; Sources: Electrek, The Street