Tesla is headed to $10 a share under a bearish case—or $391 under a bullish one, wrote a Morgan Stanley analyst this week. My model confirms he’s either spot on or miles off.
What’s clear is that the hazard lights are blinking. Tesla stock (ticker: TSLA) is the worst performer in the Nasdaq 100 this year, down 41%. Less than two years ago, the company was able to raise money at 5.3% interest, but those bonds are now priced to yield more than 9%. The cost of default protection, already more than triple what Ford Motor (F) pays, has been rising.
In the near-term, Tesla is flush enough. It recently stashed away $2.7 billion from selling stock and convertible debt. Longer-term, be wary. Car shoppers are said to kick the tires, not fondle the bonds. But there is potential for Tesla’s Wall Street weakness to creep into customer opinion. General Motors (GM) could see the reverse: rising financial resilience showing up in the shares.
I’m no electric skeptic. Battery power is the future of driving. The only reason I haven’t considered an electric vehicle is that the market hasn’t yet reached me, the outspoken minivan man. Under my bull case, America realizes minivans were cooler than sport utility vehicles all along, the market shifts, and I’m acknowledged as a sliding-door fashion leader with thumbs-ups from passersby on the road. There’s a bear case where none of that stuff happens, but it’s ridiculous.
Buyers looking for workaday all-electric vehicles that can go more than 200 miles on a charge can choose between the Tesla Model 3 sedan and the Chevy Bolt EV hatchback from GM (not to be confused with the discontinued Volt). Both are well-regarded: Car and Driver gives the Bolt five out of five stars, and the Model 3 gets four stars. Edmunds scores the Model 3 higher.
Tesla and GM each have sold more than 200,000 electric vehicles, which means a $7,500 tax perk for buyers has been halved—and will soon disappear. Meanwhile, total demand for new cars recently has been at its weakest in five years, leaving inventories looking full. GM has responded by offering $5,500 in cash allowances, or discounts, on its $36,620 Bolt, bringing the price after destination charges to just under $32,000.
Tesla has talked about price cuts but is mostly just layering on confusion. Its website allows buyers to order a Model 3 for under $32,000 “after est. savings.” That includes what’s left of the tax break, plus the projected savings on gasoline versus buying a regular car. The real price is $39,900. Or maybe it’s free, if we subtract the cost of knee replacement avoided by not walking 12,000 miles a year.
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While the knock on Tesla has long been that it struggles to deliver cars, some investors are growing concerned over customer demand, too. When Evercore ISI cut its rating on the stock from In-Line to Underperform last month, it cited an “aging” product line-up and weak demand for the company’s S and X models. That leaves Tesla highly dependent on the Model 3. And trade tensions with China could hold back growth there.
GM faces the same problems. But while electric cars are Tesla’s whole thing, they’re more of a hobby for GM. Chief executive Mary Barra has gotten the company out of things that aren’t working—Europe, some passenger cars, the Volt—and gone all-in on lucrative trucks and SUVs. Earnings per share for GM are seen increasing slightly this year, despite industry weakness. The shares are up 5% year-to-date.
For Tesla, any loss of confidence over future resale values could add to its present sales challenges. Limited pricing history makes for high uncertainty. A falling stock price and high bond yields won’t help if the company needs future financing. And tight finances could hurt Tesla’s ability to invest in product development.
There’s also the Iron Man factor. Two years ago, when Tesla passed GM to become the biggest U.S. car maker by market value, people liked to compare Tesla chief Elon Musk to the Marvel superhero, aka engineer-tycoon Tony Stark. Don’t like Musk’s Twitter antics? Look at the stock price. GM sells more than 100 times as many cars? Wall Street says not for long.
But a falling stock price can turn Iron Man into Inspector Gadget in a hurry. And there are dozens of new electric vehicles already on the way from Porsche, Mercedes-Benz, Jaguar, Volvo, and others.
GM recently traded at 5.3 times forward earnings estimates, making it the single cheapest stock in the S&P 500. The company has plenty of options to unlock value, including selling its China joint venture. A recent financing round for its majority-owned Cruise Automation unit valued that business at $19 billion.
Barclays Capital recently calculated the price/earnings ratio of GM’s core car-making business at just 2.7. GM has a history of financial difficulty during downturns, but the company now reckons it could remain solidly profitable even if a recession chopped 25% off of car demand.
I’ve been wrong so many times on GM stock it feels like an annual tradition. To give the shareholders a break, I really should lift my curse by telling readers to stay away from it. The company is likely to invest heavily in Cruise in coming years, capping earnings growth. To buy shares here, you’d have to believe they can attract a higher-horsepower valuation. Like, say, eight times earnings. Plus, the dividend yield is 4.3%. Who wants to be burdened with all that income?
Fine: Buy GM stock. Leave Tesla be. And honk if you love minivans.
Write to Jack Hough at jack.hough@barrons.com
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