Tesla (NASDAQ: TSLA) stock has an energy problem, as survey data suggests negative oil prices will crater demand for electric vehicles.
Tesla (NASDAQ: TSLA) stock has come under severe pressure over the last few trading days. Underneath the hood, there is a big problem brewing for Elon Musk’s EV company, and it all centers around the collapse of oil prices around the world.
No-one on the planet makes a sexier electric vehicle than Tesla. It’s also true that no other manufacturer stuffs their cars with so many futuristic gadgets and gizmos while simultaneously being more environmentally conscious.
This is why so many people have fallen in love with the concept of an electric car and made the leap from gasoline in the last 12 years.
Unfortunately, all the evidence suggests this isn’t true, and that’s going to be a problem for Tesla’s stock price.
While Ford, General Motors, and other makers of predominantly gasoline-powered cars have been decimated by the coronavirus, Tesla has managed to recover a huge chunk of its losses from March.
However, as the oil price went negative this week, followed by $7 WTI in the June contract as well, Tesla stock has been on the slide.
To explain why these two assets are correlated, Mark Wakefield, global co-head of the automotive and industrial practice at AlixPartners, a global consulting firm that advised on the Chapter 11 reorganization of General Motors, provided the following insight to CCN.com,
Lower oil prices are almost certainly going to dampen electric-vehicle sales, and therefore hurt EV-heavy companies. In our most recent consumer survey this year, we found that savings on fuel was the No. 1 reason for purchasing an EV (with 65% saying that’s one of their top-three reasons for liking EVs), followed by environmental impact (49%) and convenience (24%). Conversely, the high costs of EVs was a big concern for consumers (with 41% saying that’s a top-3 reason), second only to range-anxiety and related concerns (49%). And this was at a time when gasoline cost $3 a gallon.
So if fuel prices are going to be lower for longer, the additional benefits of driving a fully electric car like a Tesla is negated for the vast majority of consumers.
When you consider that government subsidies are going to run out soon and U.S. household spending is contracting, TSLA looks to have a big demand problem on its hands.
It isn’t a question of how great a company Elon Musk runs. No-one is suggesting that Tesla doesn’t deserve to be valued higher than a company teetering on the brink of bankruptcy like Ford. It’s a question of fair valuation and perspective.
As current pricing, Tesla stock is assuming that Musk’s biggest problem is going to continue to be meeting supply.
A negative oil price gives him a demand problem as consumers opt for cheaper cars that are cheaper to run. There is no evidence that electric charging is approaching the cost of gasoline in some regions.
Tesla is still a luxury brand, and America’s middle class couldn’t afford the cars they were buying before the coronavirus hit.
Remember, this was when the economy was the “greatest ever” as President Trump liked to put it. If it was great then, it certainly isn’t now.
While the environmental impact benefit of driving a Tesla is the second most popular reason to own an EV, this number will inevitably decline as financial stability becomes people’s primary concern.
The biggest reason for NOT owning an EV, the cost, will be even more prominent, and the reality of negative oil prices throws fuel on this fire.
This makes it impossible to justify Tesla stocks out-performance over other manufacturers without citing the potential in projects like solar, the Cybertruck, Robo-taxis, and the semi-truck.
All these are potential game-changers in a vibrant market and a cash drain from the core business in a recession.
While these projects are still a glint in Elon Musk’s eyes, buying TSLA on this basis is not investing, it’s speculation, and there hasn’t been a worse time to gamble in the stock market for a decade.