Tag Archives: GM

Quick Take: The Great “Tesla” Hysteria Of 2020

“Let us see how high we can fly before the sun melts the wax in our wings.” – E. O. Wilson

Since January 1, 2020, Tesla’s (TSLA) stock price has risen by $462 or 110%. TSLA’s market cap now exceeds every automaker except for Toyota. In fact, it exceeds not only the combined value of the “big three” automakers GM, Ford, and Chrysler/Fiat, but also companies like Charles Schwab, Target, Deere, Eli Lily, and Marriot to name a few large companies.

Seem crazy? Not as crazy as what comes next. Crazy are the expectations of Catherine Wood of ARK Invest. This well-known “disruptive innovation” based investor put out the following chart showing an expected price of $7,000 in 2024 with a $15,000 upside target.

Siren songs such as the one shown above encourage investors to chase the stock higher with reckless abandon, and maybe that is ARK’s intent. Given their large holding of TSLA, it certainly makes more sense than their price targets. Instead of taking her recommendations with blind faith, here are some statistics to illustrate what is required for TSLA to reach such lofty goals.

To start, let’s compare TSLA to their peer group, the auto industry. The chart below shows that TSLA has the second largest market cap in the auto industry, only behind Toyota. Despite the market cap, its sales are the lowest in the industry and by a lot. According to figures published on their website, TSLA sold 367,500 cars in 2019. General Motors sold 2.9 million and Ford sold 2.4 million.

Clearly investors are betting on the future, so let’s put ARK’s forecast into context.  

If the TSLA share price were to rise to their baseline forecast of 7,000, the market cap would increase to $1.26 trillion. Currently, the auto industry, as shown above, and including TSLA, aggregates to $772 billion. At the upside scenario of 15,000, the market cap of TSLA ($2.7 trillion) would be almost four times the current market cap of the entire auto industry.  More stunning, it would be greater than the combined value of Apple and Microsoft.

Even if we make the ridiculous assumption that TSLA will be the world’s only automaker, a price of 15,000 still implies a valuation that is three to four times the current industry average based on price to sales and price to earnings. At 7,000, its valuation would be 1.6 times the industry average. Again, and we stress, that is if TSLA is the world’s only automaker.

Summary

Tesla is one of a few poster children for the latest surge in the current bull market. That said, it’s worth remembering some examples from the past. For instance, Qualcomm (QCOM) was a poster child for the tech boom in the late 1990s. Below is a chart comparing the final surge in QCOM (Q4 1999) to the last three months of trading for TSLA.

In the last quarter of 1999, QCOM’s price rose by 277%. TSLA is only up 181% in the last three months and may catch up to QCOM’s meteoric rise. However, if history is any guide, QCOM likely offers what a textbook example of a blow-off top is. By 2003 QCOM lost 90% of its value and would not recapture the 1999 highs for 15 years. 

Tesla may be the next great automaker and, in doing so, own a sizeable portion of market share. However, to have estimates as high as those proposed by ARK, they must be the only automaker and assume fantastic growth in the number of cars bought worldwide. Given their technology is replicable and given the enormous incentives for competitors, we not only find ARK’s wild forecast exceedingly optimistic, but we believe it is already trading near a best-case scenario level.

One final factor that ARK Invest also seems to have neglected is the risk of an economic downturn. Although they do highlight a “Bear Case” price target of $1,500, that too seems incoherent. Given that TSLA is still losing money and is also heavily indebted, an economic slowdown would raise the risk of their demise. In such an instance, TSLA would probably become the property of one of the major car companies for less than $50 per share.

TSLA’s stock may run higher. Its price is now a function of all the key speculative ingredients – momentum, greed, FOMO, and of course, short covering. The sky always seems to be the limit in the short run, but as Icarus found out, be careful aiming for the sun.

**As we published the article Tesla was up 20% on the day. The one day jump raised their market cap by an amount greater than the respective market caps of KIA, Hyundai, Nissan, and Fiat/Chrysler!!

GM Cuts 14,700 Jobs As Auto Bubble Begins To Burst

On Monday, General Motors announced that it will cut 14,700 jobs or 15% of its North American workforce in addition to closing three assembly plants and two other facilities:

In the most far-reaching shake-up since the company emerged from bankruptcy more than eight years ago, General Motors will shutter three North American assembly plants and two other facilities, while also eliminating 15 percent of its salaried and salaried contract workforce, moves that together will cost an estimated 14,700 jobs.

The cuts are part of a plan to adapt to changing market demands favoring SUVs over sedans and coupes, while also shifting focus to the electrified and self-driving vehicles GM sees as central to the industry’s future.

“We recognize the need to stay in front of changing market conditions and customer preferences to position our company for long-term success,” said GM Chairman and Chief Executive Officer Mary Barra, who outlined her new plan during a conference call Monday morning.
About 5,600 jobs will be lost at the three assembly plants set to close by the end of 2019. That includes 1,500 at the Detroit-Hamtramck facility that currently produces the Chevrolet Volt plug-in hybrid, as well as the Chevrolet Impala, Cadillac CT6 and Buick LaCrosse sedan.

While GM’s CEO Mary Barra is spinning this move as a positive, I am highly suspicious because it is taking place at the same time that global auto sales are plunging (see chart below). Ford also said recently that it will cut more than 20,000 jobs across the globe as part of an $11 billion restructuring.

Global Auto Sales

GM’s layoffs and plant closures don’t come as a surprise to me because I wrote a Forbes piece in March 2017 in which I criticized President Trump’s excitement and boasts about Ford’s announcement that it was going to invest in three Michigan plants, which would create jobs:

Trump Tweet

The reason why I criticized President Trump’s excitement about Ford’s decision was because I’ve been warning (then and now) that the U.S. automobile sales boom was driven by a debt bubble that would end very badly. As I wrote in March 2017:

This credit-driven auto boom is a major reason why you keep hearing stories about “Detroit’s resurgence” and the “U.S. manufacturing comeback.” Unfortunately, interest rates will rise and a bust is sure to follow. Cracks are already beginning to show even though interest rates have barely started to rise – “seriously delinquent” auto loans have been ticking up in recent quarters.

To my ear, when President Donald Trump praises the U.S. automobile boom, it sounds strikingly similar to economists and business leaders who were praising the economic activity and jobs created by the 2003-2007 U.S. housing bubble – “look at all these great jobs being created! Lots of new jobs for construction workers, real estate agents, and mortgage bankers!” Unfortunately, when that debt-driven boom turned into a bust, many of those jobs were lost and the entire sector dragged the rest of the economy down with it. I believe that the current automobile boom will follow the same path.

Since 2010, total outstanding U.S. auto loans increased by $445 billion or 64% to over $1.1 trillion as Americans took advantage of record low interest rates to finance automobile purchases:

U.S. Auto Loans

After the Great Recession in 2008 and 2009, the U.S. Federal Reserve cut interest rates to record low levels and held them there for a record length of time, making it much cheaper to take out loans of all kinds. Notice how the total outstanding U.S. auto loans in the chart above start to soar shortly after interest rates were cut to record lows (based on the chart below)? That is certainly no coincidence. Low interest rates lead to borrowing booms that end when interest rates go back up, which is what has been happening over the last few years. Rising interest rates are threatening the U.S. automobile sales and loan bubble and will eventually cause its popping.

Interest Rates

It’s entirely possible that GM is aware of the risk of a more serious auto sales downturn ahead as higher interest rates start to bite, which is why they decided to cut jobs and close the plants before it’s too late. If that’s the case, it’s a smart move on CEO Mary Barra’s part.

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