Tesla Inc (NASDAQ: TSLA ), the leading EV manufacturer in the U.S., is slated to launch the final Model 3 sometime in July, a couple of weeks from now. Tesla has a goal to start production of its first mass-produced car in earnest later in the year and hit 10K units/week in 2018, and the anticipation has sent TSLA stock to all-time highs.
Source: OnInnovation via Flickr
As we inch closer to the final stage of the launch, it's a good idea to kick the tires a bit and check whether the Tesla bull thesis remains intact.
TSLA stock holders have rarely had to worry about Porter's Five Forces that many startups have to contend with. Rather, Tesla itself has frequently been its own worst enemy, thanks to its numerous unreachable deadlines in the past. This time around, though, the company seems to have gotten its act together, and everything appears to be running on course with no major delays.
Not surprisingly, Tesla stock has been rallying like mad - up an eye-popping 70% in the year-to-date. If Tesla belonged to the S&P 500 , only Vertex Pharmaceuticals Inc .(NASDAQ: VRTX ) would be able to hold candle to it.
TSLA investors can continue to party like there's no tomorrow. But they might just as well remember to check for signs of any approaching killjoys. And the party pooper this time could be - falling oil prices?
Oil Prices Are Cratering
After enjoying a nice rally in the early part of the year, oil prices have cratered, falling to near 52-week lows in what is shaping up as yet another bad year for black gold.
WTI Crude currently sits at $44.14 per barrel, a shade above the 12-month low as the U.S. dollar and the loonie continue weakening against leading currencies.
OPEC and several non-OPEC producers, including Russia, bit the bullet when they agreed to trim production by nearly 2 million barrels per day in January in a bid to lower inventory levels and goose prices. The cartel reached another agreement in May to extend the production cuts by another nine months. Yet, an overhang of high global inventories and increasing shale production in the U.S. have stubbornly persisted and continue frustrating OPEC's best efforts.
Blame the current situation on Saudi Arabia and OPEC being a bit of a toothless bulldog now compared to back in the day when the cartel's sway on oil prices was unparalleled. The emergence of leaner and meaner shale technology that allows producers in the country to keep pumping even when everybody else has hung up their boots means that the U.S. has effectively become the new swing producer.
Danger Zone for the EV Industry?
In January 2016, oil prices plunged to a 10-year low of below $30 per barrel. Yet, U.S. shale production only fell marginally at a time when nearly every offshore drilling company packed up and left.
That kind of resiliency might be great for President Donald Trump's new energy policies, but might play real havoc on another fast-growing but vulnerable industry - EVs. There is a real danger that oil prices could revert to near all-time lows unless something pretty drastic happens.
And that should give EV investors the creeps.
There's historical precedent to prove that low oil prices do act as a disincentive for consumers by discouraging them to switch to clean energy, including dumping their oil-guzzling SUVs for cleaner electric plug-in counterparts.
EV sales fell 8% in 2015 after oil crashed from $105 to less than $50 per barrel. This marked the first time that EV sales contracted in the industry's short history, and happened at a time when the Obama government was pumping billions of dollars into the industry in the form of subsidies.
All major EV manufacturers including General Motors Company (NYSE: GM ) and Ford Motors Company (NYSE: F ) posted heavy double-digit sales declines that seemed to poke holes into the theory that says that EV buyers are typically wealthier than buyers at large and are not likely to be deterred by low gas prices.
Bottom Line on TSLA Stock
None other than Tesla CEO himself, Elon Musk, is on record saying that EV sales were bound to get hurt by plunging oil prices, adding it's just a matter of economics. Musk though pointed out that Tesla's high-end models would weather the storm better than cheaper rivals.
Interestingly, Musk was spot-on with his predictions. Tesla was the only large EV manufacturer left unscathed by the 2015 oil massacre. TSLA cracked the psychologically important 50K unit sales in 2015, an impressive 45% year-over-year increase.
So what about the much cheaper Model 3?
Musk told CNN that he was bullish about Model 3's prospects even in an era of dirt-cheap gas "because we have quite significant product differentiation."
So far, Musk's prognostications have proved accurate. Sales of hybrid vehicles with less differentiation suffered the most during the industry slump, and have continued flounder ever since.
Just a few months ago, Wall Street thought that $60 oil was on the horizon. That has turned out to be a terrible bet, and $30 oil now seems more likely. In the final analysis, it just does not seem very likely that low oil prices will affect Model 3 sales by a significant margin.
But ultimately if push comes to shove and the industry suffers another major slump, TSLA stock will stand tall.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
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