RBC Capital on Tesla (TSLA): 'In our view, demand clearly has been tougher'
RBC Capital analyst Joseph Spak reiterated an Outperform rating and $186.00 price target on Tesla (NASDAQ: TSLA)
The analyst comments "In our view, demand clearly has been tougher and there is now hiding from the fact that price cuts hurt gross margins. Recall, late last year we cut 2023 auto gross margins (ex-credits) and now model 25.4% vs. Visible Alpha consensus of 27.7% (which has come down in recent weeks). To us, TSLA clearly seems to be focused on using its margins/cost structure to drive volume and fill up its new capacity (Berlin, Austin) which should ultimately be lower cost than Fremont production. One thing that had worried us with China price cuts is that it appears the Chinese consumer has learned to "hold out" for a lower price. Getting into a cycle where the consumer is trained to wait for the incentive is never a great place to be in (and is a classic "old-world" auto challenge). We believe these US price cuts may be steep enough so that there won't be consumers waiting for another cut. Now with the price cuts out of the way, we need to see if there is a demand response. We suspect there will be a demand response, in part because of the IRA boost in the US but also because generally, we still believe in higher EV penetration and TSLA has the supply/capacity whereas others may be more constrained (near-term) and the price is now more attractive/competitive. We also remind investors that there are margin offsets including battery cell/back production credits in the US, filling up more utilization in Austin/Berlin (sequentially from 3Q22), continued manufacturing cost efficiencies (for instance a potential Model 3 redesign, Project Highland) and lower input costs (likely more as we move through 2023). Still, from a stock perspective, we would like to see some of the mid-term expectations for TSLA come down, but we believe the market is getting closer. The risk to the stock from here is if there isn't the demand response we expect, and lower margins with lower volume transpires. Finally, the price cuts, particularly in the US, could make it more difficult for other EV players. For instance a Ford Mustang Mach-E Select RWD (entry) starts at ~$47k (247 mile range) vs. the Model Y AWD at ~$53k (330 mile range, and better spec’d). The Mach-E Premium starts at ~$55k (306 miles). So the Model Y seems to be a more attractive option (we don't mean to pick on the Mach-E, just using it as an example, Tesla will look more appealing vs. many other offerings). Further, we believe most EVs from other OEMs already have challenged profit margins (and other companies have in some cases been raising EV prices). So it will be interesting to see their competitive response as they appear to face a trade-off between hitting volume aspirations and profitability."
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Shares of Tesla closed at $123.56 yesterday.