Daiwa cuts estimates on Tesla (TSLA) as price cuts place pressure on margins

Daiwa Capital reiterated an Outperform rating on Tesla (NASDAQ: TSLA) and cut their price target on the stock to $185.00 (From $218.00) as the electric vehicle company leverages pricing power to grow volume.

Tesla reiterated its strategy to grow volumes at the expense of margin as management views price as a clearing mechanism, at which order rates meet production.

Analyst Jairam Nathan wrote in a note, “Tesla’s commitment to grow volumes by using price as a clearing mechanism is likely to put continued pressure on margins. We, therefore, conservatively model sequential declines in gross margins through 4Q23 for a 17% average in 2023E. Our 2023E, 2024E and 2025E EPS estimates go to $2.95, $5.00 and $6.15 respectively from $3.75, $6 and $7.25. While contentious, we believe Tesla is best-positioned to execute a volume over margin strategy, given its runway to cut cost/unit and generate revenue over the vehicle’s lifecycle.”

The electric vehicle company also said that it sees significant opportunity to generate revenue post-sales by selling services such as autonomy, supercharging and connectivity. CFO comments around Tesla’s ability to re-invest lead Daiwa to focus on Tesla’s free cash flow margins, which characterized as non-GAAP EBITDA margin less capex. This metric was 9% in 1Q23, suggesting some more room to cut prices, before lower margins start to hurt the company’s re-investment capabilities.

Shares of TSLA are down 0.82% in pre-market trading on Monday.

By Michael Elkins | [email protected]

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