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Tesla’s share price reverses after Musk’s Hertz tweet

The Tesla [TSLA] share price dropped 3% to $1,172 on 2 November after a tweet from founder Elon Musk poured cold water over a prospective deal with car rental firm Hertz [HTZZ], when he said, “no contract has been signed yet”.

On Monday 25 October, it was believed a deal in which Hertz would place a $4.2bn order for 100,000 Tesla Model 3 electric cars over the next 14 months had been sealed. Hertz also vowed to build a network of charging stations.

Tesla’s share price climbed 12% and helped it pass the symbolic $1trn valuation mark. Hertz’s share price also did well, surging 29% from the date of the announcement to the 2 November close.

At the time, Hertz interim boss Mark Fields said: “Electric vehicles are now mainstream, and we’ve only just begun to see rising global demand and interest.”

The company added that, beginning in early November, customers would be able to rent a Model 3 at its airport and neighbourhood locations in parts of the US and Europe.

 

Can Tesla deliver?

Musk seemed surprised by the positive reaction to Tesla’s share price and valuation gains and took to Twitter [TWTR] to declare that the problem was never demand for its EVs but getting enough of them manufactured in the first place.

“If any of this is based on Hertz, I’d like to emphasise that no contract has been signed yet. Tesla has far more demand than production, therefore we will only sell cars to Hertz for the same margin as to consumers. Hertz deal has zero effect on our economics,” he tweeted.

According to the BBC, this came as news to Hertz, who told the broadcaster that “Deliveries of the Teslas already have started”.

This could all be about semantics as Hertz, added the BBC, refused to say whether a contract had or had not been signed off.

But it could point to something deeper. Is Musk, usually so ebullient and forward-thinking, having some wobbles over the size of the deal?

Given his comments over production, can Tesla deliver?

 

Tesla’s ongoing strength

The group has seen stellar growth, with Tesla’s share price soaring 192% over the last 12 months. It’s been helped by growing awareness of the role EVs can play in combatting climate change as people, businesses and governments try to hit net zero carbon targets.

Tesla has also been boosted by strong demand for its vehicles in China. In the third quarter, Tesla posted a 389% profit hike to a record $1.6bn, with a record 241,300 electric cars being delivered.

The company is opening two new factories in Berlin and Texas and, according to The Driven website, is aiming for a 50% increase in deliveries year on year to reach 20 million annually.

20million

Tesla's annual unit output target after opening new factories

 

Tesla is also using some of its cash to create supercharger stations available to all EV models to enable faster charging.

However, there have been hiccups, such as recalling nearly 12,000 vehicles over a software issue that could cause “automatic emergency brake events”, as reported by the BBC.

 

Squeezes on supply chain

Tesla has also, like most other car manufacturers, faced supply chain squeezes amid semi-conductor shortages and rising freight costs. As the 100,000 Hertz order volume marks around a tenth of average annual Tesla production, it is quite the commitment in a time of such volatility.

Tesla is being proactive, deciding to shift to cheaper lithium iron phosphate (LFP) batteries rather than batteries made from nickel and cobalt, whose prices are soaring and where supply is low.

That may save some cash and boost volumes, but it also pushes Tesla deeper into relying on Chinese suppliers, which dominate the LFP market. That could be a factor if US-Chinese relations worsen, both economically and politically.

Analysts remain bullish however. According to Market Screener, a consensus of 33 hold an ‘Outperform’ rating.

 

“Right move” by Hertz

Hertz is more of a recovery play after its business model was battered in the COVID-19 pandemic lockdowns, forcing the company to file for bankruptcy. In its third quarter, the re-opening of society, air and road travel helped revenues soar 76% to $2.23bn.

The deal with Tesla, and a partnership with Uber [UBER] for the ride-sharing service to utilise 50,000 of the 100,000 EVs for its drivers, shows that Hertz is trying to give its image a modern, tech-focused re-boot.

“By adding electric vehicles to its fleet, Hertz can strengthen its market position amid the growing focus on ESG factors by both consumers and investors” - TipRanks' Dilantha De Silva

 

“By adding electric vehicles to its fleet, Hertz can strengthen its market position amid the growing focus on ESG factors by both consumers and investors,” said Dilantha De Silva of TipRanks. “Hertz seems to have made the right move by focusing on this lucrative target market, which might help the company achieve a competitive advantage among its peers.”

No matter what Musk tweets, expect both Tesla and Hertz to keep charging forward.

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