Cannabis Declared an "Essential Business." Tesla, Not So Much. - Motley Fool

As the COVID-19 coronavirus sweeps across the country, most states are now issuing shelter-in-place orders, essentially prohibiting residents from venturing outside and gathering in public places. In Los Angeles country, even the hiking trails and beaches have been closed despite being open, outdoor venues.

However, certain businesses deemed "essential" are allowed to operate, albeit with strict social distancing protocols. The definition of an essential business is a business, "as necessary for the health and safety for individuals and their families." Those "essential businesses" include things like grocery stores, pharmacies, banks, hardware stores, pet supply stores, and gas stations.

And in these trying times, you can add cannabis to the list. But electric vehicles? Not so much.

A hammer and gavel on top of an American flag with buds of cannabis next to it.

Cannabis has been deemed an essential business by 33 states. Image source: Getty Images.

Essential medicine

In the beginning of the crisis, the cities of San Francisco and Denver had actually planned to shut down dispensaries in the name of public health. Much like the rush for toilet paper, consumers lined up around the block outside dispensaries in order to stock up on cannabis as they prepared to hunker down for one to two months. However, after the loud uproar from constituents, authorities in these cities soon realized the error of their ways and relented.

Now, basically all of the 33 states that have some form of legalized cannabis have maintained their licensed dispensaries as open for business. Of course, all stores still have to adhere to social distancing regulations from the CDC, and many are now ramping up delivery services.

The cannabis industry is also playing its part to help the economy, hiring laid-off workers from other industries to meet the increased demand, especially for delivery orders. Much like the 1933 repeal of Prohibition re-legalized a large, in-demand business during the Great Depression, it's quite possible the cannabis industry, like those in grocery and e-commerce, can do its part easing the employment crisis as a result of this economic slowdown.

In the same vein, liquor stores have also been deemed "essential businesses" by most states as well.

Obviously, the abuse of either liquor or cannabis isn't being encouraged; Smoking cannabis isn't exactly great for one's lungs, and consuming lots of alcohol doesn't exactly make one's body more resilient to sickness. However, it appears that governments believe they can be essential medicine -- or at least welcome distractions -- from the current predicament much of the world finds itself in.

The government also wants to keep as much of the economy open as possible, given that the ongoing shutdowns have necessitated $2.2 trillion in help from the federal government thus far, with $500 billion set aside for distressed companies and over $300 billion set aside for small businesses, and that number may even grow in the future.

But Tesla is on the short end of the stick

While it may seem ironic, even though the cannabis has been granted essential status amid coronavirus, Tesla (NASDAQ:TSLA) has been ordered to effectively shut down its factories in Fremont, California, per the orders of Alameda County. The Fremont plant is the epicenter of Tesla's business, where it makes most of its Model 3, X, and S vehicles and has also begun production of the upcoming Model Y. Yet on Tuesday, March 17, county authorities decreed that Tesla only perform minimum basic operations such as payroll and keeping up Tesla's existing infrastructure.

Tesla's different car models lineup up facing camera in from of mountains.

Image source: Tesla.

This likely didn't go over well with Elon Musk, who had been active on Twitter (NYSE:TWTR) vocally dismissing the danger and severity of COVID-19. In fact, on Friday, March 13, just a few days before the order to shut down, Musk told employees at SpaceX, his other venture, that, "as a basis for comparison, the risk of death from C19 is *vastly* less than the risk of death from driving your car home. ... There are about 36 thousand automotive deaths per year, as compared to 36 so far this year for C19." Since that time, U.S. deaths have spiked to 2,384 in the span of just two weeks.

Tesla didn't initially comment on the order to shut down, but two days later released a press release on March 19 making it seem as if the shutdown was its own idea all along.

Despite taking all known health precautions, continued operations in certain locations has caused challenges for our employees, their families and our suppliers. As such, we have decided to temporarily suspend production at our factory in Fremont, from end of day March 23, which will allow an orderly shutdown. Basic operations will continue in order to support our vehicle and energy service operations and charging infrastructure, as directed by the local, state and federal authorities. Our factory in New York will temporarily suspend production as well, except for those parts and supplies necessary for service, infrastructure and critical supply chains. Operations of our others facilities will continue, including Nevada and our service and Supercharging network.

Though Musk and Tesla bungled the initial response to the outbreak, to its credit, the company has since pivoted to helping the cause by transforming its New York plant, which is used to make solar panels, into production of much-needed ventilators for overwhelmed hospitals. Musk himself has also been buying ventilators from China and donating them to stressed New York hospitals.

How the shutdown could hurt Tesla financials

The plant closure has the potential to wreak havoc on Tesla's near-term financial results. Vehicle manufacturing is a high fixed-cost business, and Tesla had just turned profitable over the past year, fueling its recent stock rise. Investors can kiss those profits goodbye for the foreseeable future, and it remains to be seen how much cash the company will burn for the length of the shutdown.

One thing Tesla does have going for it is that it recently bolstered its balance sheet with a $2.3 billion capital raise at $767.29 per share back in mid-February -- a move that is looking quite brilliant right now, as Tesla's share price has cratered all the way down to around $514 per share as of this writing, though it had fallen much lower before a recent bounce.

That $2.3 billion raise is on top of about $6.3 billion in cash Tesla had on the balance sheet as of December 31, 2019. However, Tesla also has a significant amount of debt, with $13.4 billion in long and short-term debt and finance leases. According to the press release, Tesla also has around $3 billion available on its revolving credit facility, which could boost its liquidity to about $12.6 billion if needed.

Strange days

Obviously, cannabis and electric vehicles are vastly different businesses, though both have seen surging revenues and lots of investor attention, since they are thought to be the hot new industries for the next 10-20 years. Yet due to the coronavirus, one industry -- cannabis -- seems poised to get a much-needed jolt of demand, while it appears electric vehicles' recent momentum has run into a roadblock.

If gasoline prices stay at their current extremely low levels for the foreseeable future, it could make it even more difficult for the EV industry to take off and reach cost parity with internal combustion cars. However, it's also possible that concerns about climate change could overwhelm even low oil prices going forward.

And despite the surge in cannabis demand, it's still a very challenged industry from an investment standpoint. Many companies have overextended themselves racing for global expansion, only to find themselves over-leveraged, with falling cannabis prices, not enough retail infrastructure, and a still-healthy black market.

Therefore, even though cannabis stocks saw a big rise last week off of near-bankruptcy prices as they were deemed "essential," they're still difficult investments until the industry has a much-needed shakeout. Meanwhile, Tesla's stock still isn't cheap, but if it continues to fall due to the crisis, it could open up an opportunity for long-term investors, should manufacturing open back up within a quarter or two. Yet until Tesla has a lower share price and more clarity on the length of the shutdown, I'd be cautious on its stock.

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