Baird: Tesla (TSLA) May Get an Edge During Recession

There are not many companies out there that can call a recession “good times.” Sure, there are some companies that can weather a reduction in spending better than others, but even they likely aren't putting on their party hats when the market takes a downturn. A new report suggests that one company that might get a leg up during a coronavirus-driven recession is none other than electric car darling Tesla (NASDAQ: TSLA).

A Recession Actually Gives Tesla a Boost?

The logic is baffling on the surface, but a closer look suggests there's method in all this madness. In the end, it all comes down to competition. We've all known for a while now that the electric car market had the potential to be pretty hot. If nothing else, the huge draw-down in gasoline demand due to coronavirus lockdowns has illustrated what a place can look like with fewer carbon emissions running around; just look at California.

This, in turn, was likely to get a lot of firms involved in the electric car market. We've seen advances coming out of Ford and just about every other carmaker, eager to bottle a little of that Tesla lightning in their own plants.

With a recession hitting, though, the plans to expand beyond internal combustion engines may be necessarily curtailed. A recession will likely cancel a lot of research projects and get companies refocusing on their core businesses, which means electric car plans may be shelved as Ford et al work to keep the lights on and at least some cars sold.

Tesla Has a Head Start That Will Be Tough to Beat

“There are three options for any project: fast, cheap, and good. You may pick two at any time.” This somewhat paraphrased aphorism provides the best case for Tesla on the electric car market. Tesla's entire focus is on electric cars. Its research is done, and any expansion in research it undertakes will be devoted to making its current line better. Meanwhile, all the potential competitors are still trying to get their cars together in the first place. Some are farther along than others, yes, but none is as far along as Tesla, who is currently selling many of its models, even if the lockdowns and recession have taken a lot of the wind out of those sails.

Moreover, Kallo estimates that Tesla is in a fairly decent cash position. Kallo is looking for guidance in terms of when Tesla can restart production at its California plant, but right now, Kallo figures that Tesla has the ability to absorb about half a year's downtime without serious consequences. In fact, at last report, Tesla has built roughly 14,300 more cars than it actually delivered, giving it a backlog of inventory that could be helpful if we see the hoped-for V-shaped or U-shaped recovery.

An Extra Lap Going Into The Pits

Tesla isn't likely to have things all its own way. While certainly, the recession and necessarily accompanying pullback will take down a lot of the potential competitors' plans as they cut expenses and circle the wagons, some companies are farther along than you might think. In fact, just yesterday, Ford showed off the new Mustang Cobra Jet 1400, an electric car that brought impressive performance with it. Projections suggested that the new Mustang would be able to beat an eight-second score on a quarter-mile track, which is impressive by most any score. With the Mustang Lithium and Mustang Mach-E also in play—and the Mach-E in production—it's got some skin in this game.

The recession is certainly going to limit the amount of play that other firms will have in this market.  Tesla's specialization in electric cars has given it an edge that won't be readily beaten by any other competitor, not unless they were willing to skip the “cheap” part of the “fast / good / cheap” axiom. With a recession hitting, companies won't be inclined to skip “cheap” as it may be the only thing that keeps them in business. If they skip “good” instead, they're likely to end up wasting money on products no one will buy. Thus, skipping “fast” is about the only option left, and that means little competition for Tesla in the near term.

So in the end, the recession may actually help Tesla. While it likely won't do much for Tesla's sales, or getting rid of that inventory it's building up, it may at least thin out the herd of competitors eager to take a slice of Tesla's market.