Will interest rate cuts save Tesla? Elon Musk is counting on it

Stocks rose on Thursday after the Federal Reserve cut interest rates by 50 basis points the day before. One of the biggest winners was adze (TSLA -2.66%).

Shares rose 7.4% as investors saw interest rate cuts as a clear tailwind for the largest US electric vehicle (EV) maker. That gain was enough to add $50 billion to its market cap.

Although Tesla is still the leader in electric vehicles, the company has had a challenging year. Shares are still down year-to-date, significantly underperforming both S&P 500 and his “Magnificent Seven” colleagues.

Tesla’s problems come as sales growth has slowed and margins are under pressure. The electric vehicle industry appears to be going through a bit of a correction as the once-booming demand for gas-free cars has increased.

However, CEO Elon Musk prefers to blame another culprit: interest rates. Time and again, the Tesla boss has gone out of his way to explain the challenges that interest rates have presented to potential Tesla buyers.

Image source: Tesla.

Musk’s favorite bogeyman

On earnings calls, in media interviews and in posts on his social media platform, X, Musk repeatedly bemoaned the effect of higher interest rates. In early August, he criticized the Fed for not cutting rates at its July meeting, writing in a post on X: “The Fed needs to cut rates. They were foolish not to have done so already.”

Nearly a year ago, Musk raised concerns about rates on Tesla’s 2023 third-quarter earnings call, saying:

I am concerned about the high interest rate environment we are in. I can’t stress this enough that the vast majority of people buying a car is about the monthly payment… If interest rates stay high or go even higher, it makes it that much harder for people to buy the car.

With the Fed cutting 50 basis points and more cuts expected later this year and next year, Musk looks like he’s finally getting what he wanted.

Notably, Tesla shares outperformed essentially all of its peers on Thursday, including struggling electric vehicle start-ups that are set to benefit more from lower interest rates as they need more help. Rivianfor example, it gained just 1.9% on Thursday, while Lucid in fact, it fell 0.8%.

Traditional automakers haven’t gotten the Tesla bump either. I see decreased by 0.6% and GM closed by 0.1%.

Will rate cuts help Tesla turn around?

On closer examination, Musk’s complaints about interest rates ring hollow. They appear to be a convenient excuse rather than a significant burden on the business.

First, Tesla’s exposure to interest rates is not unique to the auto industry. All automakers face this reality, and higher borrowing costs raise monthly payments for buyers who use financing. Tesla’s vehicles are also priced higher than many of its competitors, meaning its customers are less sensitive to interest rates because they can afford a more expensive vehicle.

Tesla is also a global company and less than half of its revenue comes from the US, even though the US is its largest market. While rates have also risen in some places in Europe, those markets should not be affected by the Fed’s decisions.

As the chart below shows, there isn’t much evidence that rate hikes have had an effect on car sales. While still down from pre-pandemic levels, they actually rose when the Fed raised rates and have been steady since then. Higher rates have not affected the auto market, although they may have hindered its growth.

Total US vehicle sales data by YCharts.

Finally, none of Musk’s peers have paid the same level of attention to interest rates that he has, making it appear that borrowing costs are more of a scapegoat for Tesla’s poor performance rather than a tailwind. cons.

What it means for Tesla

Ultimately, the interest rate cut is unlikely to be material to Tesla’s long-term performance, despite Thursday’s stock rally.

What’s more important is whether the company can successfully deploy fully autonomous driving (FSD) technology and whether it can continue to innovate with new products such as the anticipated affordable Model 2, robotaxi, and the Optimus autonomous robot.

We’ll find out more soon at the company’s robotaxi event on October 10 and when it reports its Q3 earnings, due in a month.

For now, investors are better off focusing on those events rather than Tesla’s rate cut jump. Rate cuts aren’t necessarily the winning catalyst Musk seems to think they are.