By Michael Elkins
Shares of Tesla (NASDAQ:TSLA) are down 0.73% in pre-market trading on Tuesday after price cuts saw the electric vehicle stock close at 211.25 on Monday, down 1.49%. Chinese electric vehicle stocks followed suit with declines averaging 15% compared to the NASDAQ’s (NASDAQ:NDAQ) +1%. Deutsche Bank attributes this weakness to negative surprise around the new Chinese leadership selection, lack of updates surrounding COVID zero policies, and concerns following Tesla’s price cuts.
Tesla lowered the domestic China price for their Model 3 and Model Y by around 5% on Monday. The cuts were not unexpected and should not come as a big surprise to investors although the timing is somewhat earlier than anticipated. Deutsche Bank believes that this should provide a boost for the order book as the Shanghai gigafactory now has capacity for 1m vehicles annually.
Deutsche Bank analysts wrote in a note, “In respect to the Tesla price cuts, we don't see the move as a big surprise based on our recent discussions and emphasize Tesla has the highest margin of any EV maker, giving it most cushion to use pricing as a lever. In our view, Tesla is likely facing a mix of weak macro and some level of growing competition in the local market. But all in we believe while Tesla is not insulated from a downturn, its growth and margins could be much more resilient than the rest of the industry in a recession globally given the various levers at its disposal.”
At the macro level, CEO Elon Musk cited near-recession conditions in China on the recent earnings call, and in a call with Deutsche Bank, Tesla mentioned overall weakening demand impacting every automaker in the region. At the same time, the EV market has also got considerably more competitive. Relative to the U.S. and Europe, China is seeing a lot of new credible products coming to market and ramping up in capacity.
Many new premium models are also hitting the market from Nio (NYSE:NIO), Li Auto (NASDAQ:LI), and Xpeng (NYSE:XPEV), starting in Q4. Without introducing new models, Tesla is essentially selling older models which are indeed popular but have a natural ceiling of demand especially after several price hikes earlier this year.
However, while the near-term setup remains challenging for TSLA, Deutsche Bank believes that the company remains best placed to deliver strong growth and margin in 2023 even with the price cuts.