Tesla (TSLA) surprised the industry when it instituted huge price cuts last week. Now we are finding out exactly what analysts think the price cuts indicate for the future of the automaker.
Goldman Sachs analysts Mark Delaney gave his opinions in a new note called “Analyzing the impact of reduced Tesla vehicle prices,” where he sees two sides to the price cuts.
On the one hand, Delaney says the price cuts can be interpreted as evidence Tesla is seeing a worrying reduction in demand for its vehicles in the US.
In the note to clients, Delaney wrote, “While the reduced prices for Models 3 and Y helps the company to better address the roughly 20%-30% of vehicles sold in the U.S. market in the $40K-$55K price band, the price cuts also imply that recent orders were tracking weakly. We therefore lower our EPS estimates on reduced ASPs (average selling price).”
However Delaney noted the reduced prices will spark more sales, and following the expansions recently of Tesla Gigafactories, as well as the recent ramp-ups of production capacity, Tesla may be able to offset the drops in retail pricing through increased efficiency.
Delaney said, “We see [stronger volumes] as important for Tesla’s vertically integrated model, especially as its new factories likely offer attractive unit economics at scale (we believe COGS per vehicle at the new Austin and Berlin factories over time will be closer to Shanghai than to Fremont, and in the low to mid $30K per vehicle range).”
Delaney also makes the case that increased volume could open the door to increased “monetization opportunities,” such as selling a raft of new customers higher margin software or more expensive services offerings.
In addition, Tesla has a huge competitive advantage due to its scale and unit economics compared to traditional automakers, and Delaney points out any increase in sales volume shuts competitors out of sales. Delaney explained, “The strategic implications of the price reductions (and the fact that investors were already anticipating at least some price reductions in our opinion) likely helps explains stock reactions on 1/13 with Tesla shares -1% (vs. the S&P 500 flat) and ahead of competitors including Ford (-5%), GM (-5%) and RIVN (-6%).”
Delaney points out that competitors cannot be happy to see the reduced prices for the Tesla Model 3 and Model Y, on top of the IRA tax credits which these new versions now qualify for, given every Tesla sold represents a competitor’s vehicle which is not sold. Combining the discounts and the tax credits makes Tesla’s Model 3 and Model Y very competitively priced compared to other electric vehicles.
Delaney goes on to note that given Tesla’s competitors are often operating on negative margins, and there is limited availability of competitor offerings, Tesla is left in a very strong position going forward.
Overall, Delaney maintains a buy rating on Tesla, although his 12 month target has been cut from $205 to $200, due to a small impact to EPS and ASPs from the price cuts
