- Donald Trump may be good for Tesla, as he may reward automobile companies that are exclusively manufacturing in the US.
- Tesla's Q3 was impressive from a margin and volume perspective. Finally, Model X commitments are winding down.
- The Model 3 has to come good on volume shipments and margins, as any struggles here would tank the share price going forward.
The auto industry has definitely come under the spotlight now that Donald Trump has become the president-elect of United States. Trump has been very vocal about the future of the auto industry under his watch where his main goal will be to bring jobs back to the US. On the surface, this should be good for Tesla (NSDQ:TSLA) as the company does the lion's share of its manufacturing and assembly in California and Nevada (Gigafactory). Furthermore, with the pending Solar City deal to go through later this month, it is expected that more jobs (mass production of solar panels) will be created in Buffalo next year.Given all this,how attractive is Tesla stock considering the risks?
Compare Tesla's US story with the likes of Ford (NYSE:F) which mass produces its smaller cars in Mexico to avail of cheaper labor. Trump has already stated that he will slap an import tax on US manufacturers when they bring their cars back to the US for resale. If Trump is true to his word and this indeed takes place, this has to be good for the likes of Tesla. Remember, Tesla will have strong competition in EV's from the likes of General Motors (NYSE:GM) and Ford in the next few years. So any edge Tesla can gain over its competitors will be grabbed with both hands.
Donald Trump May Reward Tesla And Penalize Others
Autonomous vehicles is another segment of the auto industry that Trump is expected to attack. Why? Well if autonomous vehicles gain traction in the years ahead, the US economy is looking at massive job losses. Remember, all this industry will have to see here will be a hesitancy on the government's part for approving this technology for the future investments to disappear. The technology is definitely there as illustrated by companies such as Alphabet (NSDQ:GOOGL) and Apple (NSDQ:AAPL) which are developing the software, but that is only one piece of the puzzle.
In my view, the main obstacles for getting autonomous vehicles on the road over the next decade will be approval and adoption by the public. These two critical steps will be performed by government and since most economies follow the US, Trump's decision here will be crucial. Why? Because if there is the slightest inkling that the government will stand pat on not being open to change existing laws surrounding the area of autonomous vehicles being permitted on US roads, then elevated investment in this area could cease very quickly. This has to be bullish for Tesla as autonomous vehicles probably pose the biggest threat in the long term to Tesla's growth.
In fact, I think it would suit Tesla if electrified vehicles gained traction but autonomous didn't. Electric vehicles are Tesla's mainstay but I feel the company would struggle to really compete in the autonomous area due to the huge money being plowed into that sector at present. Costs would have to come way down for autonomous vehicles to reach the mass market in the next 10 years and other companies have far deeper pockets than Tesla. Therefore, a tax break from Trump for manufacturing in the US along with electrified (semi- autonomous - max) vehicles gaining traction would definitely increase market share going forward.
Volumes & Margins Were The Surprise Factors In Tesla's Q3
Secondly, Tesla's recent set of earnings was definitely a surprise considering the projections analysts had made. In fact, Tesla was able to report a diluted EPS of $0.14, a 100%+ surprise compared to what was expected. Revenue rose to $2.3 billion, which was significantly higher than the $936 million posted in the third quarter of 2015. This was mainly due to much stronger deliveries with almost 25,000 units being shipped in the third quarter. Gross margins also took a leap in the third quarter reaching 27.7% on a non-GAAP basis. Margins were up almost 3% on a rolling quarter basis mainly due to better volume and delivery mix regarding the Model X.
High Debt And Profit Woes Makes The Stock Risky
However, now attention turns to the Model 3, the production of which will begin by the end of next year. Tesla being a growth company needs to consistently increase its volumes. This will keep debt levels at bay which will keep the company moving forward. The SolarCity acquisition would spike the debt levels in the short term. This is why the Model 3 really needs to execute in the next few years. Tesla needs a set minimum of cash flow every quarter to keep progressing.
Suppliers forking out up to 60% of the $5 billion Gigafactory will definitely help but other major risks remain on the table at this stage. What if the whole EV market doesn't take off? What if the US (or Norway & China where Tesla is also strong) goes into another deep recession? Also, look at the legal risk in case the company loses its battle to sell its cars directly instead of through franchises. This is why, I didn't like Elon Musk's recent statement that his company doesn't need fresh capital for now. Things could change on a whim if any of these scenarios play out.
While on the surface, it may seem that Tesla stock is definitely on an upward path, investors should seriously research the downside risk that comes with being long on this stock. A potential recession, debt, low volumes or the whole sector of electrified vehicles not taking off could bring down the stock hard at any point. Strict risk management is important here.
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