Many times in the past, Tesla Inc. (NASDAQ:TSLA) has been labeled a 'cult stock' due to its vast investor interest despite the company's somewhat questionable or weak fundamentals. Tesla seems to be living up to its billing, blowing the bears out again after the stock doubled from this year's low of $361 per share on March 18, despite having idled its manufacturing plants after a back-and-forth with officials.
But one Tesla bear says the EV maker now faces a much bigger existential crisis than the coronavirus pandemic: negative oil prices, even though the market has again reverted to the barely positive.
Former crypto news site, CCN, has predicted a bleak future for TSLA stock after U.S. oil prices sunk into negative territory on Monday for the first time ever in history.
Fuel, Not Ideology, the Main EV Driver
According to Mark Wakefield, global co-head of the automotive and industrial practice at AlixPartners, via CCN, low fuel/operating costs, and not ideologies like environmental concerns, are the biggest selling point for EVs like Tesla.
Mark says that 65 percent of respondents in their latest consumer survey picked fuel savings as the #1 reason for buying an electric vehicle instead of a gasoline-powered; 49 percent cited environmental impact (#2) and only 24 percent said they buy EVs for their superior convenience (#3).
On the flip side, 49 percent of consumers cited range anxiety as their biggest concern when purchasing EVs, while 41 percent said high costs were likely to act as a deterrent.
No date for the survey has been given though Mark says it was done when gasoline prices were $3 per gallon.
But there are several reasons why bears like Mark are wrong, again.
#1 Negative oil prices won't last WTI crude prices sunk to an all-time low of nearly minus $40/barrel on Monday, thanks to a triple whammy of a stubborn supply overhang, evaporating demand courtesy of a global pandemic and dwindling storage overwhelmed the markets.
To be fair, TSLA stock tanked 11.5 percent from Monday's high to close of business on Tuesday before paring back most of the losses on Wednesday. It was, therefore, easy to draw parallels between the selloff and negative oil prices.
TSLA has returned an impressive 75 percent in the year-to-date.
Source: CNN Money
Negative oil price is a bizarre situation that essentially means that oil producers would pay traders to take the oil off their hands, as we explained here. Persistent negative oil prices imply drivers would pay nothing at the pump, at the very least. But it has not happened even in Canada, where crude prices have consistently been below $0/barrel.
The absurd scenario here in the U.S. has been blamed on how the country's largest oil fund, the United States Oil Fund LP (NYSEARCA: USO), operates.
Under its investment mandate, USO has an obligation to invest in front-month WTI contracts and roll them over two weeks before every month-end. WTI May contracts were set to expire on Tuesday as per the CME futures calendar. According to Bloomberg, USO owned a quarter of all WTI May contracts.
Futures contracts allow the holder to take delivery of the physical commodity before the expiry date if they so wish. Unfortunately, WTI crude can only be delivered in Cushing, where there's very little, if any, storage left. The only viable solution left for buyers like USO's general partner/sponsor is U.S. Commodity Funds, LLC (USCF) was to settle the contracts all at once hence the huge selloff.
Can negative oil prices happen again? Quite likely, though, USO has tried to minimize the chances of this happening by moving its money from WTI June contracts to future-dated contracts. Can they last? Not very likely. Oil markets are in deep contango right now: The WTI July contract is currently priced at $16.98/barrel, $26.65 for the September contract, $29.47 for December, and $31.78/barrel for WTI April 2021 contracts. This suggests that traders believe that crude prices are likely to remain low but still rise significantly in the near future.
What we are likely to see are rampant shut-ins by producers as storage everywhere quickly runs out. It really won't come as a surprise if prices return above $30 per barrel during the second half of the year as U.S. shale throttles back output and economies emerge from lockdown.
#2 Robust growth in low oil price era
When you zoom out of the current brouhaha of negative oil prices, you will realize that we have been living in an era of low gas prices for more than half a decade now. You would have to go back to February 2012 when crude prices were around $95/barrel to find a time when U.S. drivers paid $3 per gallon on average for their gas.
Yet, this has coincided with a period of explosive growth for Tesla. The company delivered ~35,000 vehicles in FY 2014 and finished with revenue of $3.2B; Tesla recorded 368K deliveries in 2019 with revenues clocking in at $24.6B, representing an impressive 950 percent and 670 percent unit and revenue growth, respectively. Meanwhile, TSLA stock has gained 390 percent over the timeframe.
Tesla has no doubt been a big beneficiary of the biggest economic and stock market expansion in modern history. The company will no doubt face its biggest test yet if the U.S. economy descends into a prolonged recession. The COVID-19 pandemic has thrown us a big curveball, but so far, Tesla has given a good account of itself, low gas prices notwithstanding.
#3 Tesla is still cheaper
It's a well-known fact that running your vehicle is cheaper than doing the same on gasoline. How much cheaper is what is not readily apparent.
Luckily, we can work that out using a handy tool provided by the U.S. Department of Energy that allows us to compare gasoline prices and the cost of electric charging across all 50 states.
The counter (which was last updated on March 21) says the average U.S. driver was paying $2.25/gallon of gasoline compared to $1.15 per eGallon. Given the fact that gas prices have been very volatile (current gasoline price of $1.792 as per the AAA), while electricity prices tend to be much more stable, we calculate that it's still 36 percent cheaper to fill on eGallon than regular gasoline in the U.S.
For the bigger picture, we do not have up-to-date figures, but in 2017, the AAA reported that owning and operating a new electric vehicle cost $8,439 vs. $8,469 average for ICEs. Mind you, that study was released before Tesla kicked off mass production of the $35,000 Model 3, meaning the cost of ownership of an EV is likely much lower now.
Every now and then, scores of fashionable and sexy investment ideas capture Wall Street's imagination. More often than not, these hyped-up themes are largely driven by utopian narratives that are not backed by fundamentals, thus making them perfect fodder for speculation. But eventually, reality sets in, and these high-flying stocks with cult followings fall out of favor.
Tesla has hordes of challenges that it must overcome to justify its lofty valuation.
Bank of America recently issued a $485 Price Objective for TSLA shares due to ongoing/future production challenges, which implies a 33 percent downside. Further, nobody seems sure how badly the pandemic will devastate the global economy and for how long, though Tesla so far seems to be doing fine after recording strong sales in its new Shanghai factory in China, the former epicenter of the health crisis.
Tesla might be a cult stock, but as former Tesla permabear Jim Cramer conceded in January, it's the most deserving of cult stocks. That's not likely to change much during this era of low oil prices.
By Alex Kimani for Oilprice.com
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