Tesla Vs BMW Stock: Which Is Best?

Tesla Vs BMW Stock: The auto business is in a state of turmoil. In fact, it is going through a rough patch, not seen in decades.

The coronavirus pandemic has sent vehicle sales tumbling, with the sales in the U.S. and Europe expected to nose-dive 60% to 80%, superseding a brutal March where sales tanked over 40%.

The economic slowdown enforced by COVID-19 could be long lasting and vicious, a fact corroborated by unprecedented unemployment figures of over 38 million in the US alone.

Automakers across the board, which include top companies like BMW [OTC:  BMWYY] and Tesla [NASDAQ: TSLA], are trying to save as much money as possible by shuttering plants, suspending production, and sending workers on unpaid leave.

Despite all the cost-cutting measures, experts believe that it is not going to be a smooth sailing, at least for the time being. Keeping all these factors in mind, we discuss below individual challenges faced by both the companies, how they expect to cope up with it, and which one would be the better choice for investors when the economy recuperates.

Let’s dive in, if you had to choose between BMW or Tesla stock, which is best?

Tesla Is Disruptive But BMW Has History On Its Side

Tesla, Inc. [NASDAQ : TSLA] and BMW [BMWYY] share a lot of similarities as automakers par excellence. Both enjoy worldwide reputation for their luxury vehicles, which offer impeccable performance and command a premium price in the market.

However, there is a major difference between the two reputable automakers with respect to where they are currently in their life cycle. BMW was established in 1916, whereas Tesla came into existence in 2003.

BMW as such is a mature automaker with a long and distinguished history of delivering an all fronts when it comes to luxury vehicles.

Tesla nurtures ambition of being a global automobile powerhouse and the company seems to be marching confidently on the right track.

It is already the dominant electric vehicle (EV) manufacturer, and recently achieved the milestone of manufacturing its 1 millionth electric car. However, the electric -vehicle manufacturing company is yet to prove its ability and capability to profitably produce vehicles on a mass scale.

BMW 101

Bayerische Motoren Werke AG [OTC:  BAMXF], translated in English as Bavarian Motor Works, and popularly known as BMW, is a German based multinational automobile manufacturing company.

The Munich, Bavaria, Germany-based company manufactures and sells luxury sedans, convertible sports cars and motorcycles across the globe under the following brands: BMW, MINI, and Rolls-Royce. Motorcycles are marketed under the brand BMW Motorrad.

It operates through the following business segments: Automotive, Motorcycles, Financial Services, and Other Entities. One of most admired and trusted automobile manufacturers in the world, BMW forms the trio of the luxury automobile manufacturers popularly called as “German Big 3”, with Audi and Mercedes-Benz being the other two.

What’s The Skinny On Tesla?

Tesla, Inc. [NASDAQ: TSLA], (formerly Tesla Motors, Inc.), is an American electric vehicle and clean energy company, which designs, manufactures, and sells high-performance electric vehicles, energy generation and storage systems.

The company operates through the following business segments: Automotive and Energy Generation and Storage.

Its popular electric vehicles model includes Model S, Model 3, Model X, and Model Y cars.

The company produced its 1 millionth electric car on March 9, 2020.  The Model 3, with more than half a million-vehicle delivered enjoys the distinction of being world’s all-time best-selling plug-in electric car.

The Palo Alto, CA-based company founded by Jeffrey B. Straubel, Elon Reeve Musk, Martin Eberhard, and Marc Tarpenning on July 1, 2003, also sells Powerwall, Powerpack, and Megapack batteries, solar panels, solar roof tiles, and related solar energy products.

Is BMW Stock A Buy?

Technological innovation is at the heart of what the company does, which has helped it produce amazing, well-engineered cars with powerful engine for the past several decades.

In the low $20s per share, it is seriously undervalued, which arguably makes it the right time to dive in.

Investing in stock of a top-notch company with bright future prospects at a cheap price is always a prudent thing to do. BMW’s earnings over the next few years are expected to increase by over 30%, which means more cash flow and subsequently higher share value.

It seems the current share price is discounting BMW’s strong focus on EV market. BMW is already preparing for their 2021 electric mainstream models like all-electric X3 SUV and an i4 sedan.

BMW i4 have claims to travel range of greater than 400miles, a range with which Tesla is still struggling. Since BMW is currently undervalued, it may be a great time to increase your holdings in the stock.

Should you Invest in Tesla Stock?

Tesla has quickly established itself as a force to be reckoned with in the coveted world of hi-end vehicle manufacturing.

The past four years have been pretty spectacular for the electric-vehicle manufacturer, with the company witnessing a compounded annual revenue growth rate of 57%.

Model 3 and the Model Y, which are fast climbing the popularity chart, are most likely to extend that growth. Tesla enjoys dominant position in electric-vehicle making, the sale of which is expected to reach close to 9 million by 2025.

As such, Tesla finds itself in an enviable position to cash on the explosive growth of electric vehicles.

Having said that, it would be rather preposterous to think that competition will sit idle, watching from the sidelines at Tesla’s soaring fortune.

The competition has started to heat up, and reports suggest that there will be over 500 EV models available globally by 2022.

However, Tesla is most likely to continue with its dominant position owing to its technological grip over one of the most important features customers focus on when deciding to make a transition from internal combustion cars to EV—-the ‘range’ The Model S, for example, outmaneuvers its nearest competitors by a fair margin, offering  132 miles more range than any other EV in the market.

It is one of the primary reasons why demand for its cars shows no signs of letting up. A leadership position in a fast expanding market is the mantra for a solid boost in revenue and profitability and subsequently the stock price.

The company knows well that production capacity and efficiency are two critical factors that could help it profit from the strong demand its vehicles enjoy.

Tesla is working hard in that direction, increasing production facilities at both its Fremont facility and the Shanghai facility. The two production facilities are capable of churning out over 600,000 Model 3 and Model Y cars annually.

Compare that to the 367,656 vehicles the automaker delivered in 2019. It is expected that more affordable Models 3 and Y are going to be Tesla’s top sellers.

Additionally, the company has been expanding production in Berlin, which gives it the ability to deliver cars at a lesser cost and in a lesser time to its customers in Europe.

BMW vs Tesla Pros and Cons

It is a tad difficult to make the comparison between the two companies for the simple reason that Tesla is in a hyper-growth mode whereas BMW is an established manufacturer clocking single digit annual growth at its best. But still, it is important to shed some light on their scale of operation and the profits they are generating.

BMW’s revenue at 116.5 billion is over four times that of Tesla’s revenue of 24.58 billion, but operating cash is significantly lower.

Operating Cash Flow (OCF) is the amount of cash generated by the regular operating activities of a business. It is indicative of whether a company has enough positive cash flow to maintain and grow its operations. 

Weak cash flow means the business may have to rely on external financing for capital expansion.

Consumers’ expected choice for 2021 and beyond

World’s economy currently is in pandemic-induced coma. Let’s therefore fast-forward to 2021 and beyond, on the hope that the economy sufficiently recovers its ground.

By the looks of it, high-income families are less likely to bear the full brunt of a withered economy in comparison to low-income people who are more likely to be more severely affected.

This is good news for both Tesla and BMW as they carter to customers with deep pockets. Tesla has a fiercely loyal fan base with customers eagerly willing to lap up whatever it has to offer.

People bought just about every car Tesla could make in fiscal 2019. What makes it more impressive is the fact that Tesla produced 102,672 vehicles and delivered of 88,400, in the first quarter of 2020.

The company is fervently ramping up production to meet increasing demand of its vehicle, but it is expected that the company will face increasing challenge on the demand front from BMW.

The one distinct advantage that BMW currently enjoys is the rock-bottom price of gasoline, which is most likely to boost sales of its gasoline-powered vehicles. Tesla has never shied away from hyping the cost savings provided by electric vehicles. With gasoline prices near historic lows, that boast has lost some of its sheen.

Is BMW Playing Catch Up To Tesla?

Playing second fiddle is something that does not come naturally to BMW, and as such the German automaker is concentrating heavily in developing more electric vehicles. The company says it already has 500,000 “electrified” vehicles on the road and aims to reach the critical milestone of over 1 million by the end of 2021.

With the iX3, i4, and iNEXT all due to hit the road by the end of 2021, we could see BMW emerging as a real challenger to Tesla’s dominance in the EV segment.

No one is sure when the threat of the virus will fully subside and life will return to normal. However, what is assured is that the economic slowdown will lead to a significant downfall in demand.

BMW, in fact, lowered its profit outlook for the year and warned that it will have difficulty generating cash as the economic fallout from the virus turns out to be worse than initially anticipated.

The luxury vehicle manufacturer says it now sees earnings before interest and taxes margin of 0% to 3%, from 2% to 4% earlier, warning that the deepest slump will be in the second quarter.

And as per its CFO Nicolas Peter, the German carmaker no longer expects to achieve positive cash flow from car sales this year. To make matters worse, the falling profit because of the pandemic will hit automakers like BMW hard, as it is investing heavily on electric vehicles, and need profits from conventional car sales to fund such ventures.

Tesla Will Take A Hit Too

The same goes for Tesla whose car sales is expected to take a significant hit during Q2. Its main factory in California was shut down for almost half of the quarter, and though Tesla is resuming normal operations at its U.S. factories, it will be some time before the production level reaches pre-shutdown days.

On top of that, Tesla will have to ensure that its suppliers are back in business as well operating normally.  As per Tesla’s website, the company is promising a delivery time of four to six weeks for custom Model 3, S, and X orders, and a delivery timeframe of eight to 12 weeks for its new Model Y.

Also, once production gets back in full swing, Tesla will have to evaluate if it still has the wherewithal to deliver 500,000 units this year, up from about 368,000 deliveries last year.

However, both BMW and Tesla have a healthy balance sheet, which can help them ride out the storm. BMW has over 13 billion in cash, and with a strong liquidity position likely to get through a miserable 2020 and emerge safely on the other side.

Tesla also sold $2.3 billion of stock in February, lending further strength to its balance sheet. Even with factory shutdowns and slumping sales, Tesla has enough cash to survive the virus-induced economic meltdown.

Tesla Vs BMW: Which Is Best?

Tesla is all to resume normal operations at its car factory in California and its battery factory in Nevada. Also, its Shanghai factory came back online earlier than that. Despite remarkable progress on all front and world class production facilities, it is expected that it will take Tesla many-many years to come closer to the manufacturing might of the revered German automaker.

Also, BMW generates one of the best margins in the auto industry, consistently posting gross margin of around 20% and an operating margin of around 10%. Tesla expects to generate gross margin of up to 25%, not an unachievable feat given that the EV manufacturer has achieved it before.

However, speculations are rife about whether Tesla can achieve this ambitious target once it reaches a production scale of 500,000 units per year, or more.

Though Tesla has a lot of catching up to do when it comes to the scale and operational efficiency of BMW, it is the renowned German carmaker which lags behind Tesla in the highly lucrative EV market.

BMW understands the future potential of EV market, and has slowly started to dip its toes in the EV market with the i3, i8, and some plug-in hybrids, but it is going to take some time before EVs start making a significant portion of the company’s overall sale.

Despite that, we are all aware that for BMW it has always been best or nothing. The company as such is investing heavily in research and development to match, or even beat, companies like Tesla in the EV market. The company recently increased its EV budget to $8.6 billion partly to develop an all-electric iX3 SUV and an i4 sedan. But all are due to hit the road by the end of 2021, by which time Tesla would be manufacturing over a half million of Model S, X, and 3.

Tesla has emerged as a major disruptor in the automobile sector, and despite all the money and credentials, it is not that easy for an established company like BMW to change its decades long strategy in a short period of time. BMW will have to work extremely hard to wrest some control from Tesla when it comes to the EV market.

One major differentiating factor between Tesla and BMW is that despite all the hype, the former has not fully demonstrated its capability or competence to sell mass-market cars at scale and make money at the same time.

Questions have been raised in the past regarding safety and reliability of Tesla’s Model S and Model 3.  Workers’ safety has been an insistent concern at the Freemont plant, and anxiety continue to persist about Tesla’s autopilot system.

Making top of the line cars is not easy and the competition is cutthroat. Tesla as a matter of fact is yet to demonstrate its ability to produce large numbers of cars that conforms to the highest standards of safety and reliability.

Making Model X or S and sell them for a sky-high price tag or more to loyal customers is vastly different from selling hundreds of thousands of affordable EVs (Model 3) to mass-market consumers, who may not be so gung-ho about Tesla’s car as its committed luxury buyers.

Tesla still has to prove that it has the technology and resources to produce vehicles on a mass scale and at a high margin, while all the time keeping in mind the high quality the industry demands.

Until then, BMW seems to be a safer bet. Also, we know BMW is aggressively pushing into Tesla-dominated EV market, but we are still not too sure about Tesla’s capability to reach BMW’s manufacturing might and operating profit margin, at least in the near future.

Additionally, a major source of revenue for Tesla in the past three years has been ZEV credits, or zero-emission vehicle credits sold to other automakers. ZEV generated $594 million, $419 million, and $360 million for Tesla in 2019, 2018, and 2017.

However, this lucrative income stream is likely to dry up as flailing vehicle sales of other automakers coupled with their own foray into the EV segment could curtail ZEV demand. Given the fact that more than half of Tesla’s free cash flow in the past year was from ZEVs, this is likely to make gaping hole worth $1.4 billion in Tesla’s balance sheet.

Tesla vs BMW Stock: Final Thoughts

To say that economic environment is downbeat would be an understatement, and there is absolutely no way for automakers to keep themselves isolated from the economic chaos unleashed by the pandemic.

However, both BMW and Tesla have a heathy balance sheet, loyal customer base, high margins and solid cash levels.

All these factors are likely to help them emerge out of the current crisis, maybe bruised, but certainly not knocked out. We could say that investors should take a closer look at BMW as its currently looks undervalued with respect to Tesla despite more revenue and profit.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.