To The Moon

Overall passenger car sales statistics worldwide (that were highlighted in an article in March) have indicated a key point: while China and Europe are relatively more mature markets for Battery Electric Vehicles, the U.S. (and Canada) can relatively be considered a growth market. This has many implications for Tesla, which is the dominant BEV manufacturer in the latter.

Tesla's ($Tesla Motors(TSLA)$) margins have been considered to be even more fraught after a wave of price cuts were announced in recent times:

Now, like most carmakers, the company locks prices via mid- to long-term supplier contracts so the concerns over Tesla's margins are valid. However, over a longer term, this might not be a pressing issue. A key cost component in a BEV is the Lithium-ion battery. Lithium prices have seen a precipitous fall over the YTD:

This is being attributed to two factors: softer demand for BEVs in China as well as larger inventories of vehicles worldwide. Softer demand for BEVs in China, a market that has shown a year-on-year increase in overall car sales, indicates its relative maturity. The larger inventories of vehicles paired with lowering overall sales in the U.S., however, indicate buyer constraints and affordability issues. This is an issue for U.S. carmakers: foreign markets have a deep bench of legacy and upstart competitors while customers in its home turf are increasingly reduced to a "creamy layer" user segment that is over-catered.

In that regard, the decision by Tesla to take a margin hit in order to maintain market share is entirely logical. In future production runs, the present-day depression of battery raw material will likely prove to generate higher margins, depending on how it negotiates with its suppliers. The price cut also had an "electrifying" effect (pun coincidental) on used BEV sales in the U.S. over the course of Q1 this year: a 32% Year-on-Year (YoY) jump in sale volumes are estimated to have been due to falling prices because of these cuts. These figures also lend support to what user segment drives U.S. BEV sales as well as the affordability issue. 

Also depressing the long-term outlook for lithium prices is the increasing viability for sodium batteries as an alternative to those made from lithium, with sodium estimated to being 1,000 times more abundant than lithium. One company is already moving to take advantage of this breakthrough: JAC Group - jointly held by a Chinese provincial government and Volkswagen (VW) - announced the launch of the compact 5-door sedan "Hua Xianzi" powered by a sodium-ion battery. The battery solution is developed in association with HiNa Battery, a company affiliated with the state-run Chinese Academy of Sciences.

 Sales and Price Performance Trends

In terms of U.S. electric vehicle sales, there's no doubt that Tesla maintains the lion's share of sales in pure numerical terms. In terms of trends over the year as of Q1 of this year, however, the results are quite interesting:

Putting aside the aspect of lowering U.S. dominance in technology, increasing adoption of sodium-ion batteries by carmakers will likely serve to propel sales: lithium battery packs will continue to become cheaper since sodium-ion battery packs come with price advantages built in. 

While Ford ($Ford(F)$) and General Motors ($General Motors(GM)$) have been racking up a strong increase in sales, American upstarts Lucid and Rivian ( $Rivian Automotive, Inc.(RIVN)$) as well as German legacy houses BMW, VW ($Volkswagen AG(VWAGY)$) and Mercedes have shown very strong upticks. While the latter certainly do benefit from having a low numerical base in the prior year, the strong numbers indicate that their offerings are finding strong traction among the addressable market segment in the U.S.

Stock price performance for the U.S. carmakers in the Year Till Date (YTD) graphically is decidedly mixed but do show some correlation with the broad-market S&P 500:

When laid out month-wise, however, there is evidence of some form of rationalization: 

Data suggests that Tesla has been a strong directional outlier in the months leading up to April. However, April has been a depressor for 4 out of the 5 U.S. carmakers. Such a large proportion of this basket suffering a reversal is indicative of industry-wide gloom on the sales outlook: with price cuts being the way forward to keep short-term demand going, virtually every carmaker is expected to get hit on margins. However, relative to "pure play" carmakers, "diversified" legacy carmakers are tending to maintain a stronger and less volatile trajectory relative to the index. 

In Conclusion

Being in a growth market with an affordability crisis and a small number of controlling over-catered user segments is a highly tenuous situation for U.S. carmakers. Also increasingly obsolete – much like fossil fuel cars – is the argument that an investment in "pure play" EV carmakers is an investment in technological innovation. Outside of affordability, overall trends suggest that buyers are essentially only constrained from switching to BEVs along two lines:

1. BEVs requiring long "down times" for charging when compared to either fossil fuel-driven cars or Plugin Hybrid Vehicles (PHEVs).

2. Lack of quick-charging infrastructure outside of high-density charging clusters. 

Not considering affordability or infrastructure in favour of arguing for technology is a simple case of missing the forest for the trees. In that regard, Tesla has long been overvalued for tis technology. As BEVs are increasingly normalized, the argument for overvaluation grows weaker. 

The infrastructure impediment has a proven solution as seen in China and other countries: creating a universal charging standard across the United States - both "quick" and "slow" - would likely create the pathway for even higher adoption. However, this would further normalize the likes of Tesla against legacy carmakers making an EV push. The latter is by no means a minority: virtually every major carmaker has committed to producing a stable of BEVs. 

However, no stock exists in a vacuum. What does help the likes of Tesla and large legacy carmakers is that, given the macroeconomic outlook, size is driving a bias in investor choice. The larger the company, the higher its imputed survivability. Note: This was discussed in greater detail in a recent article.

Balancing this versus the well-exhibited deflation of overvaluation in U.S. equities implies that the trajectories of carmaker stocks are bound to be volatile in the periods to come for at least the duration of the current year. This can be capitalized on via tactical plays using Exchange-Traded Products (ETPs). $TSL3 can be used to deliver 3X daily-rebalanced returns on the upside while $TS3S does the same on the downside.

For articles on broader economic events that are tangential to tactical market movements, visit asianomics.substack.com