Tesla margins will tighten as price cuts wage EV war: Morgan Stanley

MEDICALJMP

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Tesla margins will tighten as price cuts wage EV war: Morgan Stanley

ByJoey KlenderPosted on March 20, 2023
Tesla (NASDAQ: TSLA) investors should prepare for tightening margins as price cuts wage a war between electric vehicle makers, Morgan Stanley said in a note.

After reiterating an ‘Overweight’ rating and a $220 price target on the automaker’s stock, Morgan Stanley analysts said that the recent moves by EV makers across the industry to reduce prices are indicative of a trend and not a fad.

“We believe EV price cuts are not a fad, but a trend,” analysts wrote in a note. “While subject to volatility, investors should anticipate further cuts in EVs with cost-leader Tesla setting the tone.”

Price cuts are occurring across the industry and making competition more fierce within the EV sector. While Tesla has managed to set the tone with price cuts early in 2023, it has continued to refine prices in both directions. Many companies have directly responded to Tesla’s cuts with discounts of their own, some bigger than others. Others have avoided the strategy altogether.

The price cuts have been used to stimulate demand, and it has worked because who doesn’t love a lower price tag? While companies that haven’t been in the EV sector long enough to have a stable system of operation, evident through struggles with software, price cuts are basically the only thing they may have control over currently.

While Tesla may lead the sector in terms of overall EV performance, including range, reliability, and charging infrastructure, prices are being undercut by competitors. Additionally, companies are gaining more experience in the EV manufacturing front, and this is helping them become well-versed in a tough industry. However, they are still many years behind the leader.

We talked this weekend about how competitors will need more than a cheap car to dethrone the EV king, and Tesla will only go so far down in terms of pricing with its current models.

Although a more affordable option is on the way, Tesla will work with what it has for now, and in order to make its already industry-leading vehicles reach even higher sales figures, it can just cut prices.

But this comes with a consequence for investors, Adam Jonas, the Morgan Stanley analyst responsible for covering Tesla, said in the note:

“As the supply/demand environment continues to change, we would prepare for potentially lower margins (at gross and OP) than consensus currently forecasts for Tesla. This could potentially drive more opportunistic entry points into the stock. At the same time, we believe Tesla’s EV competition (startup and legacy players) will continue to struggle to catch up, driving restructuring and consolidation across the EV landscape.”

Disclosure: Joey Klender is a TSLA Shareholder.

I’d love to hear from you! If you have any comments, concerns, or questions, please email me at [email protected]. You can also reach me on Twitter @KlenderJoey, or if you have news tips, you can email us at [email protected]. Although a more affordable option is on the way, Tesla will work with what it has for now, and in order to make its already industry-leading vehicles reach even higher sales figures, it can just cut prices.

But this comes with a consequence for investors, Adam Jonas, the Morgan Stanley analyst responsible for covering Tesla, said in the note:

“As the supply/demand environment continues to change, we would prepare for potentially lower margins (at gross and OP) than consensus currently forecasts for Tesla. This could potentially drive more opportunistic entry points into the stock. At the same time, we believe Tesla’s EV competition (startup and legacy players) will continue to struggle to catch up, driving restructuring and consolidation across the EV landscape.”

Disclosure: Joey Klender is a TSLA Shareholder.

I’d love to hear from you! If you have any comments, concerns, or questions, please email me at [email protected]. You can also reach me on Twitter @KlenderJoey, or if you have news tips, you can email us at [email protected].

https://www.teslarati.com/tesla-tsla-margins-tighten-ev-price-cut-war/
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Gurule92

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I'm all for more price cuts. And tesla will still make more per car than everyone else lol
 

ÆCIII

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Even if more price cuts or price wars happen, Tesla's margins will likely never be as low as legacy auto's margins already are right now. Tesla has more room for price cuts than most if not all of the others. So if Tesla's margins approach single digit levels, most others would need to price at negative margins to compete.

Tesla can endure lower margins a lot longer than other legacy auto companies can endure negative margins, especially since Tesla has nearly zero debt and many of the others are buried in debt. Legacy might not be in nearly as much debt if they hadn't wasted money over many years on the MSM and discounts to dealers for their own profit markups. They could've sold for a lot higher margins over quite a few years by now, and thus likely would not have accumulated as much debt.

The basic math of margins decreasing (for anyone) during a 'price war', is elementary and obvious, so I don't know why they make it sound like it's something new, 'unforeseen' or whatever. When it comes to Tesla, the MSM isn't trying to 'predict' trends as much as they are trying to 'create' trends.

- ÆCIII
 

Sirfun

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Who has the balls to take on Tesla for a price war? Nobody even wants to make price cuts like Tesla has already done!
 

charliemagpie

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Tesla built 1.3 million cars in 2022.

In 2023 the total will be over 1.8 million, even closer to 2.1 IMO.

At least 600,000 of these extra cars will come out of these 2 new factories.
( Approx. 50% of last year's production. )

Average the costs. I still think they will be around 20%
 
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madquadbiker

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Who has the balls to take on Tesla for a price war? Nobody even wants to make price cuts like Tesla has already done!
Maybe this is only for the U.K. but apparently Tesla has just cut the price on the lowest priced M3 by ÂŁ4000+ down to ÂŁ38000 ish, only for cars that are in stock.
 

HaulingAss

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It seems odd to me to warn of lower margins when legacy auto has negative margins on EV's and Tesla's EV margins will still be 2X-3X the margins legacy gets selling ICE vehicles.

One thing I think we can all get onboard with is lower prices are good for EV adoption and will drive sales to new heights, far above analysts EV adoption projections.
 

Diehard

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I think Tesla margines are a function of Production capacity and demand. Tesla will be OK taking the margins down to zero. All the out of warranty Tesla which need Tesla only parts, charge on Tesla network, buy new services or may need to rent FSD will be additional source of revenue soon. Getting as many of them on the road as fast as possible is the key for Tesla.

The price fluctuation however may make people hesitant to buy when price go back higher (unless everyone else is out of business or simply can not compete).
 

Ogre

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Teslas margins were fine in early 2021 when their cars were selling for less than they are now.

In 2022, there were massive shipping costs, huge raw materials pricing bubbles, huge shortages in chips, and Tesla was ramping up 2 brand new factories.

Most of those headwinds are gone. Factories are up to 250k cars/ year and 200k/ year for Berlin/ Texas respectively.

Margins will do fine. Maybe instead of quadruple industry they will be triple industry averages.
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