Daiwa Capital recently reiterated an “Outperform” rating on Tesla (NASDAQ:TSLA) amidst the electric vehicle maker’s aggressive pricing strategy. The firm, however, lowered its price target on TSLA stock to $185.00 from $218.00. The adjustment comes as Tesla leverages its pricing power to drive growth in volume.
“Tesla’s commitment to growing 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 per unit and generate revenue over the vehicle’s lifecycle,” the Daiwa analysts wrote.
During the Q1 2023 earnings call, Tesla executives highlighted that the company is prioritizing volume growth at the expense of margin. CEO Elon Musk even noted that Tesla could sell its cars at very little profit since the company’s vehicles could generate post-sale revenue from products such as autonomous driving. Musk has noted that Tesla’s autonomous driving program is a crucial part of the company’s long-term potential.
“Tesla is in a uniquely strong strategic position. Because we’re the only ones making cars that, technically, we could sell for zero profit for now and then yield actually tremendous economics in the future through autonomy, no one else can do that. I’m not sure how many people will appreciate the profundity of what I’ve just said, but it is extremely significant,” Musk said.
Interestingly enough, the analysts took a particular focus on the CFO’s comments about Tesla’s capacity to reinvest, which led Daiwa to concentrate on the company’s free cash flow margins, as noted in an Investing.com report. This metric stood at 9% in the first quarter, which suggests that there is still additional room for price cuts before lower margins start impacting Tesla’s reinvestment capabilities.
Disclosure: I am long TSLA.
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