I have been wondering a lot lately how TSLA would perform in a recession?
Recessions usually start when consumers lose confidence in the economy and slow or stop spending.
This causes company sales and profits to fall resulting in lower share prices. A secondary effect occurs when companies have to reduce prices due to increased competition in a shrinking market. This causes further share price decline and further loss of confidence.
Companies supplying essential services to governments or utilities etc usually do best in a recession as sales in these areas don’t suffer much. Banks and consumer discressionary usually do worst (you don’t need that loan and no you can’t have that dress, have to keep the car going another couple of years too).
So, what happens to TSLA?
Innitially with recessions SP of all companies fall. Some companies will go out of business while others will do OK. The SP of the OK batch of companies will rise as investors get better than expected earnings reports. You won’t see bull market valuations but the money will move from the going bust lot do the doing OK lot, who incidently, probably have real businesses producing real things.
TSLA falls into this latter category.
Tesla energy is a utility business supplying fuel for transport (electricity) and battery storage to other utilities and governments. This market will still exist in a recession.
Tesla Semi will prosper as transport is cut throat in a recession. Companies will look to cut any way they can in hard times,- Tesla Semi will rock.
What about the car business you ask?
Tesla has 500,000 orders for model 3 and large pent up demand for model Y. Worst case scenario. Tesla loses half its model 3 orders in a recession due to one reason or another. They would still have 250,000 orders and with some new orders continuing to flow in (even in a recession) Tesla would take another 2 years to clear the backlog.
In other words the Tesla Auto business would continue to grow strongly.
But the car market will be shrinking you say. Yes this is true. Legacy ICE
Car manufacturers will be decimated.
They will be hit with increased Tesla competition and a shrinking market.
TSLA margins will not suffer as demand will outstrip supply for many years to come.
What about other EV’s?
They are 10 years behind Tesla and will never catch up. Tesla has the batteries (with a new secret sauce it is rumoured), the best auto pilot IMO and the best overall tech running their cars. Not to mention their advanced manufacturing (they will get there)
Well, I’ staying long for 20 years, I can’t imagine a better company to sit out a recession with.
It depends on what the cause of the recession/depression is and what else is going on. Looking back at some previous downturns, entertainment tends to do well during economic hard times because people are looking to escape reality, especially cheap entertainment. During the Great Depression the movie industry boomed. In a future downturn, Netflix and Amazon might cut back on their production budgets for new content if they needed to, but they would still have lots of cheap entertainment to offer.
Heavy industry is more difficult to predict and a lot depends on what else is going on in technology at the time. During the Great Depression the car industry stayed afloat, but did belt tightening. My father's father was a factory foreman in a car parts factory (piston rings) and while they laid off people and everyone else took a paycut, the experienced people stayed employed, including my grandfather. My father was 9 when the Depression started and he was a lot less affected by it than my mother whose father was a welder in Los Angeles.
The Depression was a boom time for aircraft because it was also a time when new tech was coming along and it was the big new thing. Air travel was very expensive then, but Douglas and Boeing were in fierce competition to produce the best airliner and both made a lot of money off the competition. In the US there was very little military spending on aircraft until the very late 30s, the commercial and private market were driving everything.
Fast forward to the US recession of the 1970s. It was started by the wind down of the Vietnam War (reduced government spending on the military combined with former soldiers looking for work) combined with the US oil industry passing peak oil in some of the largest oil fields. Oil production became more expensive and quantity dropped. The US was forced to import oil for the first time which initially was very cheap from overseas. Turmoil in the US government combined with a national malaise also created some uncertainty and probably didn't help much. The US being the biggest economy in the world by a large margin, the rest of the world felt it too to some degree.
When OPEC found its strength and raised oil prices, it set off a spiral in the US. Inflation went nuts and there was panic about gasoline. Makers of gas guzzling big cars like the US Big 3 got hit hard. However, it opened the door for Japanese imports ready to exploit new markets. Americans bought Toyotas, Datsuns, and Hondas because they were cheaper to run than US cars, but found that small cars could actually be better than giant land yachts and Japanese quality was often better than cars from the Big 3.
It was boom time for Japanese car makers. They had a large market thirsty for their product, even though the economy in the US was bad.
In 2008, the causes of the crisis were different. It was greed on the US money markets and manufactured products that were unregulated the triggered the crash. Any company that relied on getting loans was hurt because there was no money to lend for a while. Companies that had enough cash to operate did OK. Especially tech companies a long ways from the core of the crisis (physically and metaphorically).
All of the US car companies were on shaky ground and two went bankrupt. Tesla was small and almost went out of business in 2008 because nobody was financing anything right after the crisis started and they needed financing to move on to the next stage, the Model S.
If an economic downturn was triggered by another financial crisis, Tesla might struggle, but it would probably survive. The roadmap might get stretched out as they slow down expansion and concentrate on sales. Even when times are bad, there are still enough people with money to keep a smallish car company afloat if their product is considered good.
If the economic downturn was instead caused by a major war in the Middle East, that would probably be a boon to Tesla. The US imports very little Middle East oil, but a drop in ME exports would cause shortages in Asia and Europe which in turn would put pressure on the foreign supplies of US oil and the US would feel the pain too. Just like the 1970s oil embargoes, people would flee from gas guzzlers to more economic cars. That would leave Tesla in the poll position as the maker of the most compelling alternative vehicles.
Tesla is also branching out into commercial vehicles which would also be a boom business as any company with trucks would be seeking cheaper ways to move goods.
If the economic downturn was due to a war on the Korean Peninsula or a crash of the Chinese economy, that would probably be initially very difficult for any company that makes or sells tech. A war in Korea would make flat screens unavailable. Korea makes something like 90% of the world's flat screens and most of that production is around Seoul. Seoul is within artillery range of the North Koreans and even if the war didn't turn nuclear and the North Koreans were quickly routed, Seoul would be trashed by a massive artillery barrage until the artillery was overrun by forces from the south. The city would likely be hit for several days and the North Koreans have had plenty of time to bore sight (pre-select targets) their artillery and they can hit the most valuable economic targets within range.
China's economy has become so deeply intertwined with the rest of the world almost everything of any complexity made in the world has parts made in China. A simple downturn of the Chinese economy would not cause significant hits to the rest of the world, but political turmoil might or more likely an environmental crisis could shut down Chinese production.
China has a ticking time bomb in its agricultural region. India has the same problem. Both countries have been feeding their people by irrigating their crops predominantly with ground water. During a drought, having ground water reserves is a good thing, it kept California going during its drought. However using fossil water on a large scale constantly is a bad idea for the long term. China is almost out of ground water in a large region of the country and just about every drop of surface water is claimed or contaminated.
Most industrial processes are more water intensive than agriculture, per acre. If China's water wells run dry, which will happen, quite possibly in the next 10 years, they will be forced to shut down water intensive factories to redirect water to agriculture. It will mean a short term massive shortage of parts for industry all over the world, but as industries adjust, it will turn into an economic boom for parts makers that start producing domestically again. Prices will go up because of the costs of restarting production in new places combined with higher labor costs, but the rest of the world's economies would recover stronger than we've seen coming out of a recession in a long time.
In the Korean War scenario, Tesla would be unable to produce cars for a while, but they wouldn't be alone. Nobody would. Tesla with its ties to Silicon Valley would likely be the first car company to secure an alternate source of parts. Being a lower volume car maker, they also would be able to get up to max volume quicker with a new supply.
In the Chinese crash scenario, Tesla would also take a short term hit, but they are very flexible about sourcing parts and any parts currently bought from China would be sourced from somewhere else very quickly. They probably would start making some parts themselves as they have done in the past. Again Tesla would be the first car maker to emerge from the economic downturn.
About the only likely scenario that really threatens Tesla would be another banking crisis. But that's the worst case scenario for most industries.
