Tesla (TSLA +2.69%) and UPS (UPS 0.19%) might appear odd comparators, but their investment propositions share a few things in common. They are both cyclical companies. As such, their near-term earnings and cash-flow prospects were negatively impacted by rising interest rates. In addition, the investment theses for both rest on the answers to the same two questions: How will the company emerge from this period of economic uncertainty, and what is management doing to position it for growth?
Why rising rates hurt Tesla and UPS
Rising interest rates make the cost of borrowing more expensive. That's not good news for automakers, as most people take out loans to buy new cars. It's also not good news for package delivery companies like UPS because it curtails economic activity, resulting in lower demand for deliveries.
It also leads to customers looking to shift to cheaper options. I'll get back to this point regarding Tesla in a moment, but first, here's a look at how these phenomena have played out with UPS so far this year.
NYSE: UPS
Key Data Points
UPS in 2023
The chart below shows a significant volume decline over the first nine months of this year compared to the same period of 2022. Also, it shows that volumes for the company's premium services have declined significantly more than its cheaper ground service volume.
|
UPS Domestic Package Segments |
Revenue Per Piece (Year to Date) |
Average Daily Package Volume Change (Year to Date) |
|---|---|---|
|
Next Day Air |
$22.31 |
(11.9%) |
|
Deferred |
$16.59 |
(22.2%) |
|
Ground |
$11.20 |
(7.4%) |
|
Total |
$12.59 |
(8.9%) |
Data source: UPS presentations.
The same phenomena of relatively weakening demand and customers looking to switch to cheaper options are also in play with Tesla. However, there is a key difference between UPS and Tesla. The logistics giant operates in a mature industry where protecting and growing margins is imperative, and its domestic package average revenue per piece of $12.59 for the first nine months of 2023 was up 3.4% year over year.
The keys for UPS are to ride out the cyclical weakness and concentrate on growing in its targeted end markets, which include small and medium-sized businesses (SMB) and healthcare -- things that UPS is doing exceptionally well.
Tesla prepares for growth in 2024
While UPS has been raising prices, Tesla has notably cut prices on its electric vehicles (EVs) to maintain sales growth. With interest rates on car loans now higher than they were a couple of years ago, automakers are feeling pressure to lower their prices to keep vehicles affordable in terms of the monthly payments that most buyers must make.
NASDAQ: TSLA
Key Data Points
While it's easy to point the finger at Tesla and declare that its price cuts (and declining margins) are a sign that its competitive position has weakened, the reality is somewhat different.
A contextual account of Tesla's price cutting and declining margins this year stresses the nature of the industry and the importance of maintaining its lead in the electric vehicle space. Despite the doom and gloom, U.S. battery EV sales were up nearly 50% year over year in the third quarter, and Tesla's market share was a whopping 50%.
Tesla needs to maintain that market share because it allows the company to continue investing in factories to increase production and reduce its cost per vehicle. The average cost of goods sold per vehicle has come down by $2,000 since the start of 2023, and stood at $37,500 in the third quarter.
The company's ongoing cost cuts are essential to offset its price cuts and ensure Tesla can develop affordable cars in the future and grow margins when interest rates decline. These two things are long-term positives, and investors should note that competitors like Ford and General Motors are scaling back their electric vehicle investment plans, which should strengthen Tesla's competitive position in the future.
Simply put, unlike UPS, Tesla is not operating in a low-growth mature market with a few established players. Instead, it's operating in a high-growth market where the overwhelming bulk of profits are yet to be earned. Consequently, its price-cutting strategy makes sense even though it comes at the expense of near-term profit margins.
Image source: Getty Images.
UPS or Tesla?
Both of these stocks are attractive as long-term investments, and nothing is stopping you from buying both. UPS and Tesla face near-term headwinds as the economy remains constrained by relatively high interest rates. However, both are taking the right actions to ensure long-term revenue and margin growth, even as UPS is raising prices and Tesla is cutting them.
In a sense, the ultimate decision between these two comes down to your risk/reward profile as an investor. Tesla will better suit growth investors who are looking to capture significant upside potential, but it has more downside risk if interest rates remain high for an extended period. UPS offers less upside potential, but its valuation and 4.3% dividend yield are compelling, and will probably better suit more investors than Tesla right now.
