Tesla shares have stumbled since the beginning of the year. Since early January, the Tesla share price has fallen from around $880 to under $662.16 on 23 March. I think that Tesla affects the energy market through its solar panel business and also in theory with its electric vehicle business. Royal Dutch Shell (LSE: RDSB) is a leader in the energy sector, so here’s how I think Tesla’s decline affects the RDSB share price.
Tesla & Royal Dutch Shell
Although its primary business is making electric vehicles, Tesla affects the oil market. Because Tesla shares have done well over the past two years, I reckon many renewable energy stocks have also done well over the same time span. As a result of the stock’s strength, many renewable energy companies have more access to capital to grow faster. If renewable energy stocks grow faster, renewable energy might be more cost competitive sooner due to more potential scale or better potential technology. Were that to happen, demand for traditional oil might not be as strong.
If Tesla shares decline, however, demand for other renewable energy stocks might also decline. This could lead to renewable energy being less competitive and that could be good for Royal Dutch Shell’s oil business.
I reckon Royal Dutch Shell also benefits from Tesla shares falling in a different way as well. If renewable energy stock shares decline, Royal Dutch Shell could potentially find it easier to do M&A with lower valuations in renewables and go green faster.
Royal Dutch Shell has recently done M&A in renewables by agreeing to purchase a leading electric vehicle charging company in the UK, Ubitricity. Given how big the sector will be in the future, I reckon management will go on to do more deals in the sector.
What’s next for Tesla?
While Tesla shares have fallen from their highs, I don’t really know what’s going to happen next. While Tesla is still trading at a very high valuation given its current fundamentals in my view, stocks don’t necessarily trade on fundamentals all the time. Fundamentals can also change over time. As a result of the uncertainty over Tesla’s future price, I wouldn’t factor the current share price decline of Elon Musk’s company into predicting where the RDSB share price might be headed.
The RDSB share price: what I’d do
I’d buy and hold shares given the current RDSB share price because I think Royal Dutch Shell has a lot of things outside of oil production that make it a ‘value stock’ in my eyes.
Royal Dutch Shell itself has competitive natural gas and chemicals businesses that theoretically aren’t as affected by electric vehicle adoption as oil prices are. For 2020, for example, Royal Dutch Shell’s chemicals division reported adjusted earnings of $962m and its integrated gas division reported adjusted earnings of $4.383bn.
Moreover, Royal Dutch Shell also has a growing convenience business that offers additional diversification.
That said, I reckon the RDSB share price does still depend a lot on the price of oil. Although oil prices have increased substantially since November, they could always decline. Any meaningful decline might negatively affect the RDSB share price.
All in all, however, I’m optimistic management will succeed in transforming Royal Dutch Shell into a green energy company and I reckon that shares will increase in value over time.
