In this podcast, Motley Fool senior analyst Tim Beyers and host Deidre Woollard discuss:
- If the strong numbers for new car sales will continue.
- The power of Tesla's brand in the electric vehicle space.
- Why we shouldn't get too excited about the prospect of flying cars yet.
Deidre interviews Bigger Pockets' podcast host Dave Meyer on the demographic shifts impacting real estate investing.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on July 06, 2023.
Deidre Woollard: Car sales are up even as prices rise. Can the good times for automakers last? Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst Tim Beyers. Tim, how are you doing today?
Tim Beyers: Good, caffeinated, and ready to go, Deidre.
Deidre Woollard: I love to hear it. Tim, I think new car buying might be back. Some news out from the Wall Street Journal says we're looking at an estimated 13% rise in overall sales through the first half of the year, and that's data from Awards Intelligence. People are paying more according to data from J.D. Power. The average price is up 3% to 46,000, first half of the year. Oh my goodness, what is driving this? Is this leftover supply chain pent-up demand? What's going on here?
Tim Beyers: That's what it seems like, it does appear, so 7.7 million vehicles sold from January to June. That's according to Awards Intelligence. The big winners were, apparently, this is according to the journal, GM, Honda, Hyundai. The thinking here appears to be that consumers have shown no reticence to slow their role on spending despite inflation worries, and so I think there's a bit of pandemic overload here. We got so battered by the pandemic that we want to get back to normal. You couple a replacement cycle, some easing of supply chain restrictions, and just Americans' desire for the next vehicle. That is something that, here in the States, it's one of those statement purchases that you make every once in a while, and it's a fun statement purchase to make, and that appears to be happening here, Deidre. I'd say one thing. It's not a great time to buy a car because there is no incentive for your dealer to lower prices in any way. So if you're going shopping for a deal, forget about it. You're not going to get one.
Deidre Woollard: I wonder if that's going to be driving people back to used cars. When we look at economics, it's always this cycle. We had people going to used cars during the pandemic because new cars weren't available. Now used cars people aren't as interested. Prices have gone down there a lot. All of a sudden, new cars are the new hotness again. We just keep going through this, don't we?
Tim Beyers: We do. This will be a cycle that we go through, and then we may have a bit of an easing over the next couple of years. This is the market where replacement cycles do tend to drive buying in a way. But I would say this is probably sustained for the next 6-12 months. It's an interesting replacement cycle. It will ebb and flow as it tends to do in this market. I think you're right that for the people that either can't afford or do not want to spend these elevated prices for new cars, it'll be an interesting time for used vehicles. Then we'll see. The only thing that this report didn't mention that I was hoping to see, Deidre, is an uptick in sales of electric vehicles. Now there's other evidence elsewhere that I know we're going to talk about an uptick in electric vehicle sales, but that would have been the thing that really would have put this over the top to me. I would have been much more encouraged if this report had said, hey, 7.7 million vehicles sold from January to June, and of those, 7% were EVs. That would have been highly encouraging, but we just haven't seen that yet. We're still waiting for it.
Deidre Woollard: Absolutely. You've set me up perfectly to talk a little bit about Tesla. It's interesting because they've kept doing these incentives. It seems like it might have worked out in their favor. They had over 46,000 vehicles delivered for the second quarter. That was about 20,000 cars more than expected. But, and it's big but here, it produced more vehicles than it delivered by over about 13,000. Tesla, they've built, built, built, built because they just assumed they'll sell it. Could they actually overproduce? Is that a real thing at this point?
Tim Beyers: I absolutely think it is. Inventory has been rising faster than overall sales at Tesla. They absolutely could overproduce here. Now, to be fair to Tesla, they are doing the hard work of trying to seed the market in the US for electric vehicles. They are the tip of the spear here. No matter what you think about Tesla as a company, how it's managed, how great it is, whether or not you like the cars, dislike the cars, they're the tip of the spear that is helping lead the electric vehicle revolution here in the United States and elsewhere, so I can't really blame them too much for being aggressive in their production targets, but I'll tell you one thing though, Deidre. If they continue to overproduce, if the inventory does continue to outpace sales, you do risk some inventory write-downs, you may risk some deep discounting, and that's a factor here. One of the things I've been looking at, and actually, not just me, I should give more credit to Alicia Alfiere on the investment team. She's been doing a lot of work on looking at Tesla gross profit per vehicle after you factor out the benefit from government subsidies on a pure basis, and that has been going down.
Let's just be clear about what we're talking about here. Tesla filed an 8-K. The overall numbers here is, on production, the Model S and X, 19,489, delivered, 19,225, so close but not quite. The Model 3 and Y, 460,211 produced, 446,915 were delivered, so overall, like you said, 479,700 produced, 466,140 delivered. That's almost 14,000 more. It's a lot more. There is a chance that Tesla is going to have to work out some inventory excess here. But I would caution that that is likely to be more of a short-term problem than a long-term problem. If they do have an overabundance of inventory, they can use things like discounting to get rid of it. The worry is they've been using so many incentives to create so much demand, and they're still overbuilding at where is the give in terms of price incentives, but we're going to have to watch this. You don't want to see gross profit per vehicle keep going down. At some point, we'd like to see that reverse.
Deidre Woollard: The incentives thing is interesting because they have been doing that at the end of every quarter to juice things, and they're not going to be able to do it, it seems like in China as much, because in Shanghai, there were 16 car companies. They took partnered ceremony at the China Automotive Forum. They agreed to a bunch of things, in part, to stabilize prices and avoid what they called abnormal pricing. I'm pretty sure that abnormal pricing was aimed at Tesla.
Tim Beyers: Yes, it was.
Deidre Woollard: Tesla was the only foreign company they're signing on this. What does that mean for China and Tesla going forward if they don't have these incentives? They've got the Gigafactory. They're producing a lot. Is that a big concern?
Tim Beyers: I look at this as a ceasefire in the price wars. It doesn't mean they have no leverage. Tesla is a big dog in China. Let's talk about where Tesla is. As a market, overall revenue for China has almost tripled from 2020-2022 from roughly 6.7 billion to 18.2 billion. That's December 2020 to December 2022. That's huge. That's enormous. In the same period, United States, which is the biggest market here for Tesla from 15.7 billion to 40.5 billion, so not quite growing at the same pace, although also growing briskly. I do think Tesla has a lot of influence. I hate to sound cynical on this, but it means that they can't kill Nio as fast as they would like to. Really, that said, they cannot bury Nio in price incentives and price them completely out of the market and destroy a local Chinese company to the degree that maybe they might've have wanted to. They have to be a little bit more competitive here. But they're still the big dog. They have a brand advantage. The Chinese government is well aware that Tesla's presence is important. Like you said, they've got the Gigafactory there. There's lots of reasons that Tesla wants to succeed in China, and China wants Tesla to succeed in its home territory here. In short term, yes, they'll lose a little bit of pricing leverage, but we should not, for a second, think that the Chinese government does not love Tesla and will not do whatever it takes to make them successful inside China. They really want Tesla to be successful in China.
Deidre Woollard: Which is interesting because right now we're in this situation with some back-and-forth between the US and China on things like chip technology and the Cloud. How do we factor that in as a risk? Like you just said, Tesla and the Chinese government, they seem to be in a great relationship, but there's this overarching conflict that seems to be emerging here.
Tim Beyers: Let's talk about this without making any political statements here because it would be too easy to make a political statement. But Elon Musk has separated himself from the US government in terms of, as the face of Tesla, his own dealings with the Chinese government and has been a friendly face for the Chinese government. You can make of that whatever you want, but in terms of adding cover for his business in China, he is doing that by creating a partnership with the Chinese Communist Party and the Chinese government. I do think there's a caginess to what Musk has done in order to create some air cover for Tesla as a business that's entirely distinct from this bare-knuckles fight that we're seeing on trade between the US and China. Tesla could still get caught up in it in ways that I really don't understand because I do not specialize in international trade law. But for the most part, based on what we can see, Tesla's leadership is doing what it takes to create a cooperative relationship with the Chinese government that is likely to be good for their ability to do business in that territory.
Deidre Woollard: Let's switch over and talk about GM a little bit. They're interesting because they had 90% sales gains for the quarter, 1.3 million vehicles sold. Only around 36,000 of that was EVs. You talked earlier about wanting to have those EV numbers for overall. I want GM to succeed. Most of those sales were the bolt. Bolt is going away as it GM plans to rollout its EVs on its Ultium platform. They're very excited about Ultium. It's taken a long time to get going. They're going to launch the Silverado on Ultium, which, of course, people are more familiar with that brand name. They haven't had great success so far with the Lyriq and the Hummer EV that are on the Ultium platform. What do you think here? As GM ramps up, is it game on?
Tim Beyers: You would hope that it's game on.
Deidre Woollard: I hope it's game on.
Tim Beyers: They hope it's game on. I hope it's game on because a more competitive market is better for consumers. Having said that, those 36,000 EVs is 2.8%. That's 2.8% of the vehicles sold here, so that is not a lot. They have a long way to go to make a real dent here. It's not to say that they can't. Does one production line do it? There's a lot that needs to be done. You have to get proper distribution. You've got to get this out to consumers. You've got to market it in a way that's highly attractive. This is another area where, at the risk of giving, I sounded some cautions about Tesla and gross profit per vehicle. Let's talk about where Tesla is really strong. They have a huge brand advantage, and you cannot discount that. GM, as good as they are at making cars, even if they get really good at making cars on their Ultium line, and those cars are excellent cars, you still have to do a lot of work on the brand side to convince a consumer that buying a GM-brand EV is comparable to or better than Tesla-brand vehicles because here's the thing that I think we know about Tesla. All things around it aside, it is a premium brand, and it's a premium brand in EVs. It has a coke-like attachment to EV. Tesla equals EV. When I think EV, the first thing I think is Tesla. By occupying that place in my brain, I have an immediate market advantage, and that's not something that can be overcome with just a really good production line. I do think that there's a lot of work for GM to do, but I think it's less on the production side, Deidre, and more on the brand and marketing side. You have to create real desire for the GM brand. We got to get back to the days where, like, here's what I'm looking for. I want it to have its Corvette moment, when it has a Corvette moment with a great EV sports car that is just mouthwatering, that people want to buy, now we're talking. But until we have that moment, I do think Tesla has a significant brand advantage.
Deidre Woollard: What you said that is really significant is the difference between GM being, like, you like Silverado, look, it's now an EV versus it's an EV, you want an EV because of this particular EV, and that's where Tesla's strength is.
Tim Beyers: Exactly like we have made, and they've done it on both sides. Probably the most divisive vehicle I've ever seen in my life is the Cybertruck. I know people who love it. I really do. I know people who cannot wait to get their hands on this vehicle. Then I know people who are, like, I don't know what this is. I'm not preparing for the zombie apocalypse. Get this away from me. But you know what's true about it is it creates passion both for and against. If you're GM, you need to be creating passion for your vehicles.
Deidre Woollard: One thing I feel I might be a little bit passionate about is I was promised flying cars in the future, Tim.
Tim Beyers: Yes, we were.
Deidre Woollard: I have received no flying cars, but I may someday receive flying cars. The Federal Aviation Administration, the FAA, they granted a company, called Alef Aeronautics, the rights to test out essentially a flying car, Model A, nice [inaudible] there. They've got what they call an experimental special airworthiness certification. Basically, it allows them to test it out. Should I be excited? Is my flying car finally arriving?
Tim Beyers: I hate to burst your bubble, but I would not get too excited about this too quickly. The more interesting market here for me, and there are public companies in this market, and I can give you two of them are VTOLs, so vertical takeoff and landing. Vehicles that are much more like air taxis. There are two tickers I can give you. EVTL, which is Vertical Aerospace, they came public via SPAC, a newer maker of VTOLs, and then another one, which is ACHR, which is Archer Aviation. They also are in the business of VTOLs. VTOLs are interesting in that you have this idea of essentially an air taxi in city transportation, and having something that is maybe a bit more affordable on a consumer basis, like if you had, I'm going to say, a 10-seat vertical takeoff and landing air taxi that is a short-haul flight citywide. That typically would have been served for billionaires who can afford to hire a helicopter. It displaces that market. I think it's very early for that market, and I would not go all in on these public companies. However, they are interesting. It is a rule-breaking technology. I think it's much closer than flying cars. I want flying cars too, Deidre, but before we get to that, I'm a little more interested in having a look at the VTOLs.
Deidre Woollard: Yeah, the VTOLs are interesting. The one I've been following is Joby. They're also publicly traded. They just received approval from the FAA for flight testing. They're a little bit farther along in this. That stock has been going nuts, and it's interesting because Joby has got some good partnerships. They're backed by Toyota. They've got a partnership with Delta to develop this stuff. If you're thinking about these, should you be looking at the partnerships as a potential sign? Is that a positive thing?
Tim Beyers: Yes. But you should also think about it. Just for those who don't know, Joby is ticker JOBY. I think it's a little bit like a biotech where you have a partner that helps a small biotech, and it creates a revenue share. They have a whole distribution partner. The big pharmaceutical companies will often do that with small biotechs. So yes, but you don't want to get overexcited either. I think it's a decent sign. If I'm right, I believe that Archer also has a partnership with United. That's a decent sign. But it really doesn't guarantee anything because, boy, you have to do a lot of work before you get a commercially approved route, and then you have to file flight plans with the FAA. There's all sorts of things that must be done, but a partnership is a decent sign, but it's a guarantee of nothing.
Deidre Woollard: A guarantee of nothing, that is true when you're looking at a lot of this. I'm not going to get my flying car today. Tim, thank you so much for your time.
Tim Beyers: Thanks, Deidre.
Deidre Woollard: Once I a failed experiment, I chat with Dave Meyer, host of BiggerPockets, on the market podcast about the changing world of real estate investing. Let's talk a little bit about real estate investing and single-family rentals' price that kept going up and up. Now we're seeing maybe a little bit of a slowdown. With real estate investing, it seems like, investors, they're looking at their options. Because if prices are going down, maybe there's not a great upside in a fix and flip. If they're holding, if they're doing the BRRRR thing and trying to buy and hold, are they going to see rental prices increase? What are you seeing in that?
Dave Meyer: I think there is still opportunity in real estate investing, pretty much in any type of environment, but the type of tactics that work definitely shifts. To your point, BRRRR, which stands for buy, rehab, rent, refinance, repeat, is basically a way of injecting capital into a deal, fixing it up, and then refinancing your money out so you could recycle it, is no longer as attractive as an option. Flipping actually is really interesting right now because the prevailing logic is that it's less lucrative because home prices are correcting a bit. But what we see both anecdotally and in the data is that there are very good opportunities in flips right now because the nature of the correction we're seeing in the housing market is that what we would call a "stabilized asset," something that's fixed up that is really nice. Those prices are stable or actually going up right now, meanwhile, things that need those renovations, that need a lot of work, are seeing a deeper correction. That creates a broader spread of opportunity for people who want to fix and flip. You can buy at a discount, but the price you can sell it at is not coming down as much. That's one way you can make money. But I think, generally, most people on BiggerPockets, at least, or most real estate investors are not flipping.
They're mostly buying rental properties. I think the increase in asset prices is, for most investors, mostly really consider it a bonus. At least at BiggerPockets, we don't teach people to count on appreciation during their underwriting. Everyone sees the housing prices go crazy, and yes, over time, they have always trended upward in the US, but they actually don't grow that much faster than the pace of inflation. It's usually at 1% over the pace of inflation is the average. As real estate investors, what we really care about more are the things that we can control because we are investors, but we're also entrepreneurs. We have to operate these businesses. It's not just like buying a stock. We care a lot more about cash flow, about value-adds so you can create and build equity by improving the quality of the property. There's something called amortization, or loan paydown, that can earn you a yield as well. Those are the things that don't really go away even in these types of correcting markets. That's it. There are certainly more risk. There's absolutely more risk in a correcting market, and you need to account for that, but actually, every single experienced investor I know is buying more now than they were a year or two ago.
Deidre Woollard: Interesting. You mentioned that properties that need a lot of work maybe aren't as desirable. Do you think that is part of a general shift of people not wanting a fixer-upper or not feeling like they're up to the task of maybe renovating a house?
Dave Meyer: I think there's a few things going on. One is we do see small to medium investors still pretty active, but we've seen some institutional investors leave the market over the last year who are doing a lot of these fix-and-flips, most notably the iBuyer groups, which Zillow famously failed at that, Opendoor has reported major losses on that, so we're seeing some players leave the market. I think the other thing is people are really burned by the supply chain and labor shortages during COVID that made it extremely difficult to renovate properties. I don't know how familiar you are, but there's this whole saga with garage doors, and you couldn't get them for 6-9 months, and you can't get a certificate of occupancy if you don't have a garage door, appliances were super hard, so I think people are less attracted to that right now. But if you're an experienced flipper, a lot of those supply chain kinks have been resolved. Labor is still tight, but a little less tight, and so for people who have the stomach for it, it still can be lucrative.
Deidre Woollard: You've mentioned the iBuyers. I've watched that. I've been fascinated by that, the whole saga. We've got Opendoor and Offerpad, those are about the only players left in the space. Is this a failed experiment, or is this maybe necessarily going to continue on as a smaller part of the market?
Dave Meyer: I think in its first iteration, it did fail. I just think they underestimated the complexity of the operations in a lot of ways. Having been a landlord for a long time, it's very difficult to systematize. It's not something that you could do super easily, and they grew really fast. I do think the idea that a lot of them have of these instant offers is a good idea and that might still play out, but I wonder how much they'll be trying to operate these businesses. I think the model definitely needs some refinement. In its current form, I don't think it will succeed.
Deidre Woollard: Speaking of landlording at scale, what do you think about some of the institutional players? Some of them have scaled back their buying. A lot of them were buying massive amounts of single-family rentals in a lot of cities. It seems like some of them now are scaling back in certain cities, maybe concentrating a little bit, possibly because of what you're saying, they're realizing that a far-flung portfolio is really hard to be at edge.
Dave Meyer: We are seeing them pull out, not in a super dramatic way. Invitation Homes, which is the biggest one, I think they were net sellers in Q1, but buying a couple of hundred homes, which for them is not a significant portion of their portfolio, I do think that most people overestimate the share of properties that these institutional investors own. By most estimates that I've seen, it's somewhere between 1-3% of the total housing market. At BiggerPockets, we believe that 90% of rental properties are owned by people who have 10 units or fewer. That is mostly just small entrepreneurs. But that is on a national level. I think, like you said, they are very regionally focused now. If you are in one of those regions where they are super active, you're definitely going to notice it, like Atlanta or Charlotte or Phoenix. They buy up significant portions of individual zip codes and can really dictate the market prices there and really control markets. That does really matter. I don't think they're going away. I think they have big war chests. They are probably waiting a little bit for prices to come down, but they have better financing terms than everyone else. They can sit on losses for a little bit and wait for rents to grow, so I think they're going to be a little bit more focused but that they will probably enter the market again as soon as they feel like the market has hit the bottom, and they will probably help set the bar.
Deidre Woollard: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
