Single-Minded Tesla To Ride Out The Coronavirus Auto Storm

As investors scour the rubble of the global automotive industry for positive signs, electric car maker Tesla Inc stands out as perhaps the only competitor with a chance of emerging from the coronavirus crisis with its future intact.

And it’s a measure of the shell-shocked mood amongst investors that a stock market rating raised from ”underperform” to “neutral” could inspire a massive spike in a company’s share price.

But that happened to Tesla after investment bank Credit Suisse did just that Tuesday. Tesla’s share price closed Wednesday around $730 from $480 in early April, but it’s worth pointing out that this volatile stock was at $899 in late February.

Other investment banks joined in the rush to embrace Tesla. Goldman Sachs
GS
initiated coverage of Tesla Wednesday with a “buy” recommendation and $864 12-month price target.

Investment researcher Jefferies was in on this early, with its “buy” call on April 6.

“We upgrade Tesla as the only auto (manufacturer) legacy-free (with no internal combustion engine baggage), engaged in a positive EV (electric vehicle) sum-game, doubling market coverage with Model Y (SUV) and leading the industry’s technological transformation,” Jefferies analyst Philippe Houchois said in a report.

Credit Suisse analyst Dan Levy said as the industry transitions to electric power during a coronavirus impacted world, it will be more difficult for traditional carmakers which have to balance current soon-to-be-outdated technologies, while Tesla can concentrate on its pure electric lineup. Levy said Tesla will face short-term problems as demand softens in the second quarter and with the Fremont, Calif., plant shut down.

“We cut our 2020 deliveries forecast to about 400,000 from our previous 550,000 forecast…… Volume (will grow) to 1.2 million units by 2025, making it the clear number 4 global luxury brand behind the German brands (BMW, Mercedes, Audi), solid margin expansion, a 2025 PE (price/earnings) multiple of 18 times, far more than other auto manufacturers…….,” Levy said in the report.

Tesla delivered about 367,500 vehicles in 2019, 50% more than the previous year.

Despite European legislation practically forcing auto makers to only build battery electric vehicles by 2030, the German luxury manufacturers are lagging far behind Tesla in the race to provide electric cars.

Tesla soared to the top of the Western European electric charts in 2019, more than tripling its sales to 109,469 compared with 2018, thanks mainly to the huge success of the Model 3. Now the competition will include the Audi e-tron Sportback, Volvo XC40, Polestar 2, Porsche Taycan and Mercedes EQC.

Investment bank Goldman Sachs echoed the good vibes.

“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,” the report said.

“We believe that the combination of Tesla’s product leadership, brand/early-mover advantage, vertical integration, and the long development cycles in autos (new cars can take 2-4 years to develop) will help Tesla to maintain a strong market position. We also believe that the Model Y will help Tesla to have more traction in the important SUV and crossover market as the price is lower than the Model X,” the report said.

Investment bank Morgan Stanley
MS
agreed that investors like Tesla’s simple and single-minded long-term growth plan, but warned about some short-term hurdles for the company.

“We believe investors should prepare for a reasonable degree of emerging challenges in the weeks to come. COVID-19 remains an extremely fluid situation and we do not believe the restart of production will be seamless,” Morgan Stanley analyst Adam Jonas said in a report.

“We believe there are a number of risks to restarting vehicle production in Fremont, which provides downside risk to Q2 deliveries and cash burn; additionally, we would not be surprised to see knock-on impacts to localized China production as a result of potential parts shortages in the U.S, given some dependency on certain items that are still imported like the drive unit,” Jonas said.

It is strange that rules designed to force European manufacturers to produce electric cars ends up with a foreign rival like Tesla, based in the U.S. with fewer reasons for producing electric vehicles, dominating sales, at least until Volkswagen starts selling its ID.3, scheduled for August.

Tesla will publish its first quarter financial results April 29.