Tesla (TSLA) is Catching up to General Motors

Tesla Surpasses $50 billion in Market Cap

Tesla Inc, (NASDAQ:TSLA) formerly Tesla Motors, Inc., is trading near all time highs this week. Its shares are up about 90% year to date as investors pile on. With a market capitalization of $50.3 billion this week, the company is now worth more than Ford Motor Company (NYSE:F) which is only worth $44.8 billion. General Motors (NYSE:GM) is currently worth $51.7 billion. If Tesla continues to grow at its current pace it can easily overtake GM in a matter of days or weeks.

How is it possible for a company such as Tesla, with less than 10% of General Motors’ sales and hardly any profit, to have a valuation so high? One reason is because Ford and GM are valued like traditional car companies while Tesla is being valued as a technology company. Even internet companies such as Tencent have relatively large investments in TSLA. Both Ford and GM pay very attractive dividends higher than 4%, and are profitable. But Tesla has the most growth potential out of the three. But higher potential returns also mean more risk. One problematic area may be the growing concern for sub-prime auto loans.

The great recession in 2008 forced many Americans to change their spending habits. The cause of that financial crisis could be echoed in the auto industry today. When most people hear the term “sub-prime” it mostly likely will bring back memories of property foreclosures and mortgage defaults. That’s because of a sub-prime mortgage problem that wrecked the economy in 2007 and triggered a national recession. Fortunately the housing has somewhat recovered since then. But many economists are now keeping a close eye on the auto industry. Data from the New York Fed shows that auto loan delinquencies have reached an eight year high.

In the fourth quarter of last year, 2016, there was $23.4 billion delinquent auto loans in the United States. The last time it reached this level was in the third quarter of 2008 when there was $23.5 billion auto loans in delinquency. But that doesn’t even include loans considered seriously delinquent, which means they are at least 90 days past due. These 90 days late delinquencies have reached $8.2 billion.

The report notes that in total the delinquencies are just 3.8% of the $1.16 trillion auto loan sum in the country. But it acknowledges the similarities between today’s high auto delinquency rate and the mortgage delinquency rate that caused the last major recession. By 2008 a lot of sub-prime mortgages have been given to people with low credit scores. We’re seeing the same thing now with auto loans. However, U.S. household debt doesn’t look exactly as bad as eight or nine years ago. Today, fewer borrowers have housing related debt like mortgages. But auto loans and student loans are actually higher. The optimist will argue that even if we experience a major auto industry crisis it wouldn’t be large enough to take down the U.S. economy like the housing sector can. However, it is important to remember that the auto sector is capable of impacting additional industries in unforeseen ways.

In an event where auto makers have to take a hit on bad loans, Tesla will not be immune. Most U.S. automakers had not reached their sales expectations in the latest quarter. Plenty of people are leasing but not a lot are buying. This means there are a lot of new unused vehicles that are sitting in dealerships. Reports from analysts cannot find any positive catalyst that can turn around the sales numbers. I would stay way from TSLA at the present time. Perhaps there will be a good time to purchase this stock in the future but the risk outweighs the possible reward for me.

This author does not have any shares of TSLA and does not plan to own any within 72 hours of this post.