Motley Fool Hidden Gems Investing - Car Sales Are Soaring

Episode Date: July 6, 2023

The numbers for the first half of the year look strong for car sales, will EV sales start being a bigger piece of the pie? (00:21) Tim Beyers and Deidre Woollard discuss: - If the strong numbers for new car sales will continue. - The power of Tesla’s brand in the EV space. - Why we shouldn’t get too excited about the prospect of flying cars yet. (21:25) Small landlords still make up the bulk of single-family rentals. Deidre Woollard interviews Bigger Pockets’s podcast host Dave Meyer on the demographic shifts impacting real estate investing. Companies discussed:  GM, TSLA, JOBY, OPEN, RDFN, EVTL, ACHR Host: Deidre Woollard Guests: Tim Beyers, Dave Meyer Producer: Ricky Mulvey Engineers: Dan Boyd, Heather Horton Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst Tim Byers. Tim, how are you doing today? Well, caffeinated, ready to go, Deidre. I love to hear it. Well, Tim, I think new car buying might be back. Some news out from the Wall Street Journal, it says, we're looking at an estimated 13% rise in overall sales through the first half of the year. That's data from Wards Intelligence. And people are paying more, according to data from J.D. Power. Average price is up 3% to $46,000 first half of the year. Oh, my goodness. What is driving this? Is this like leftover supply chain pent-up demand? What's going on here? That's what it seems like. It does appear.

So, 7.7 million vehicles sold from January to June, that's according to Wards Intelligence, and 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, you know, here in the States, it's sort of 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 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. Yeah, I wonder if that's going to be driving people back to used cars. You know, when we look at economics, it's always this cycle, right? And so 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 kind of going through this, don't we? We do. And I mean, this will be a cycle that we go through. And then we may have some,

a bit of an easing over the next couple of years. This is the kind of market where replacement cycles do tend to drive buying in a way. But I would say this is probably sustained for the next six to 12 months. It's an interesting replacement cycle. It will ebb and flow as it tends to do in this kind of market. I think you're right that they're, you know, 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. And then we'll see. I mean, the only thing that this report didn't mention that I was hoping to see, Deidre, is an uptick in sales of electric vehicles. That doesn't, now there's other evidence elsewhere that I know we're going to talk about, 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 January to June, and of those, 7% were EVs. That would have been highly encouraging, but we just haven't seen that yet. So we're still waiting for it.

Yeah, absolutely. Well, you've set me up perfectly to talk a little bit about Tesla. And, you know, it's interesting because they keep doing these incentives. It seems like it might have worked out in their favor. So, they had over 46,000 vehicles delivered for the second quarter. That was about 20,000 cars more than expected. But, and there's a big but here, it produced more vehicles than it delivered by over about 13,000. You know, Tesla, they've kind to build, build, build, build, because they just assume they'll sell it. Could they actually overproduce? Is that like a real thing at this point? Oh, I absolutely think it is. I mean, inventory has been rising faster than overall sales at Tesla. And so 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 U.S. 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 or 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. 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 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 Alfieri on the investment team, who's been doing a lot of work on looking at Tesla gross profit per vehicle after you factor out the benefit from government subsidies like on a pure basis and that has been going down and so given these numbers and let's just be clear about what we're talking about here tesla filed an 8k 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 delivered. So overall, like you said, 479,700 produced, 466,140 delivered. So, you know, that's about 13,000, 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 much incentives, 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. I mean, you don't want to see gross profit per vehicle keep going down, down, down, down, down. At some point, we'd like to see that reverse. Yeah. And the incentives thing is interesting because, yeah, they have been doing that at the end of every quarter to kind of

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 part in a 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. Tesla was the only foreign company there signing on this. So, 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? Well, it means that I look at this as a ceasefire in the price wars. It doesn't mean they have no leverage. I mean, Tesla is a big dog in China. And let's talk about

where Tesla is. As a market, China's overall revenue for China has almost tripled from 2020 to 2022, from roughly $6.7 billion to $18.2 billion. So that's December 2020 to December 2022. That's huge. It's enormous. In the same period, the 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. So I do think Tesla has a lot of influence. It just means, I mean, I hate to sound cynical on this, but it means that they can't kill NIO as fast as they would like to. I mean, really? That's it. 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 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. This is short-term. Yes, they 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, really want Tesla to be successful in China. Which is interesting because right now we're

in this situation with some back and forth between the U.S. and China on things like chip technology and the cloud. How do we factor that in as a risk? Is that any risk for, it seems 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 sort of be emerging here. Well, and let's talk about this without making any kind of political statements here, because it would be too easy to make a political statement. But Elon Musk has kind of separated himself from the U.S. government in terms of his own, as the face of Tesla, his own dealings with the Chinese government and has been kind of 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 U.S. 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. Let's switch over and talk about GM a little bit. They're interesting because they 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. It looks like most of those sales were the Bolt. The Bolt is kind of going away as GM plans to roll out its EVs on its Ultium platform. They've been promising. 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, you know, people are more familiar with that brand name. They haven't

had great success so far with the Lyric and the Hummer EV that are on the Ultium platform. What do you think here? As GM ramps up, is it game on? Well, you would hope that it's game on. 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 vehicle sold here, so that is not a lot. They have a long, long, long way to go to make a real dent here. it's not to say that they can't and does one production line do it there's a there's a lot that needs to be done in order to like 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 that's highly attractive this is another

area where at the risk of giving like i 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. Even if GM, as good as they are at making cars, even if they get really good at making cars on their Altium 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 a 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, and 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. 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. 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, okay, now we're talking. But until we have that moment, I do think Tesla

has a significant brand advantage. Well, I think what you said there is really significant is the difference between like 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. Right, 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. And 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. And if

GM, you need to be creating passion for your vehicles. Well, one thing I feel like I might be a little bit passionate about is, I was promised flying cars in the future, Tim. Yes, we were. I have received no flying cars, but I may someday receive flying cars. The Federal Aviation Administration, the FAA, they granted a company called LEF Aeronautics the rights to test out, essentially, a flying car. Model A, nice nod to Ford there. They've got what they call an experimental special airworthiness certification, basically allows them to test it out. Should I be excited?

Is my flying car finally arriving? 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 i can give you two of them are uh vtols you know so vertical takeoff and landing uh vehicles that have are much more like air taxis so there are two tickers i can give you um evtl evtl that is vertical aerospace so they They are a newer, they came public via SPAC, a newer maker of VTOLs. And then another one, which is ACHR, which is Archer Aviation, Archer Aviation. And they also are in the business of VTOLs.

And VTOLs are interesting in that you have this idea of essentially an air taxi and 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 like a 10-seater, right? Like a 10-seat vertical TAFOC 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, right? And it sort of 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 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. 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. So they're a little bit farther along in this. That stock's been kind of going nuts. And it's interesting because Joby's got some good partnerships. They're backed by Toyota. They've got a partnership with Delta to develop this kind of stuff. If you're thinking about these, should you be looking at the partnerships as a potential sign? Is that a positive thing? Yes, but I think it's, you should also think about it. And just for those who don't know, Joby is, is ticker J-O-B-Y. I think it's a little bit like a biotech where you have the

partner that helps a small biotech and it, it, it creates a revenue share. So there's, you know, they have a whole distribution partner. The big pharmaceutical companies will often do that with small biotechs. 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. Yeah, 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 and there's all sorts of things that must be done, but a partnership is a decent sign, but it's a guarantee of nothing. A guarantee of nothing. That is true when you're looking

at a lot of this. Well, I'm not going to get my flying car today, Tim. Thank you so much for your time. Thanks, Deidre. Was iBuying 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 rentals. Single-family rentals, prices kept going up and up. Now we're seeing maybe a little bit of a slowdown. With real estate investing, it seems like investors are looking at their options, right? Because if prices are going down, maybe there's not a great upside and a fix and flip. if they're holding, if they're doing the BRRR thing and trying to buy and hold? Are they going

to see rental prices increase? What are you seeing in that? 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, BRRR, which stands for buy, rehab, rent, refinance, repeat, basically a way of injecting capital into a deal, fixing it up, and then refinancing your money out so you can sort of 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, quote unquote, stabilized asset, something that's fixed up, that is really nice. Those prices are stable or actually going up right now. We mile things that need those renovations that need a lot of work are seeing a deeper correction. And so that creates a broader spread of opportunity for people who want to fix and flip. So you can buy at a discount, but the price you can sell it at is not coming down as much. So So 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. And I think the increase in asset prices is, for most investors, mostly really considered a bonus. At least at BiggerPockets, we don't teach people to count on appreciation during their underwriting. Everyone sees 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 like 1% over the pace of inflation is the

average. And so as real estate investors, what we really care about more are the things that we can control because we are investors, but we are also entrepreneurs. We have to operate these businesses. It's not just like buying a stock. So we care a lot more about cash flow, about value add so you can create and build equity by improving the quality of the property. There's something called amortization or loan pay down that can earn you a yield as well. And so those are the things that don't really go away in even in these in these types of correcting markets. That said, there's certainly more risk.

You know, 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. Interesting. So you mentioned that there is, uh, that properties that need a lot of work maybe aren't as desirable. Do you think that is part of a sort of general shift of people not wanting a fixer up or not feeling like they're up to the task of maybe renovating a house? yeah 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 was like zillow sort of famously failed at that open door 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 like this whole saga with garage doors and you couldn't get them for six to nine months and you can't get a certificate of occupancy if you don't have a garage door. You know, 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. Well, you mentioned the iBuyers. I've watched that. I've been fascinated by that 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? I think in its first iteration, it did sort of 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. Um, it's not something that, uh, you could do super easily.

And that grew really fast. I do think the like idea that a lot of them have of these instant offers is kind of a good idea and that might still play out, but I wonder how much they'll be trying to operate these businesses. Um, and I think that the model definitely needs some refinement and in its current form, I don't think it will succeed. 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 what you're saying,

they're realizing that a far-flung portfolio is really hard to bandage. Yeah, 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 by a couple 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% to 3% of the total housing market. And from data we have bigger pockets, we we believe that 90 percent of rental properties are owned by people who have 10 units or fewer. So that is, you know, mostly just small entrepreneurs. But that is on a national

level. And I think if you like you said, they are very regionally focused now. And 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 sort of dictate the market prices there and really control markets. So 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. You know, 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. 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 Willard. Thanks for listening. We'll see you tomorrow. Thank you.