The failure of banks including SVB Financial's Silicon Valley Bank and First Republic have roiled the stock market -- and investor confidence -- in recent weeks. And this is against the backdrop of an already difficult economic environment. With inflation raging, central banks have been lifting interest rates, which has put further pressure on banks and those who borrow from them for loans.
The banking turmoil soon may have an impact on Tesla (TSLA 12.06%), according to chief executive officer Elon Musk. As part of his speech to shareholders, Musk issued an ominous warning about banks, Fortune reported.
If Musk is right, Tesla's earnings and share price may face great difficulties in the months ahead. Let's find out more.
Asking for a car loan
Not everyone can pay cash for a new Tesla. In fact, Experian data showed that two Tesla models were the most financed new electric vehicles (EV) in the fourth quarter of 2021.
The problem today is, considering the banking crisis and higher interest rates, banks aren't lending as easily as they've done in the past. And that means it may be more difficult these days for a potential buyer to secure a bank loan to buy a new car.
Of course, Tesla's efforts to decrease the prices of its EVs in recent times may limit any potential impact. The company's cars have become more affordable, so some buyers may need a smaller loan -- or might skip a loan altogether.
Earlier this year, Tesla reduced prices on its lowest-priced vehicles, the Model 3 and Model Y. The move brings the Model 3 to just under $40,000.
Still, Musk is preparing for the worst.
If banks are "on their way to the cemetery, increasing their auto loan portfolio is not the first thing on their mind," Musk told shareholders, according to Fortune. "So, this is going to be a challenging 12 months, I want to be sort of realistic about it."
On top of that, Tesla's price cuts have made an impact on earnings. In the first quarter, the company reported declines in net income and operating margin. That's after the company announced record-breaking revenue, operating income, and net income in the fourth quarter of last year -- in spite of economic headwinds.
Should you flee Tesla stock?
So should you flee Tesla stock considering all of this? Not necessarily.
Tesla's vehicle price cuts may be hurting earnings now, but they should help over the long term. Lower prices on the cars should spur more people to buy a Tesla. And, on a bright note, Tesla said operating margin has declined at a "manageable rate."
As mentioned, a lower price may make it easier for some buyers to find a loan, even in today's difficult environment. That's because they won't have to borrow as much due to this lower price point.
And in spite of Musk's grim warning, he remains upbeat for the long term. "My best guess is that the global economy turns around in roughly 12 months, and then Tesla will be in an extremely good position," he said in the Fortune report.
It's true that today's lending environment could hold back Tesla's sales in the near term. And that may hurt the share performance too. But, over time, the company's prospects remain bright.
Tesla already is a market leader, and the move toward lower prices should broaden the company's customer base. It's well positioned to benefit from growth in the EV market. And that means shares of this innovative company could deliver impressive gains over time.
