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Prepare for lower margins as Tesla price cuts become a 'feature' of EV market - Morgan Stanley

Published 2023-03-20, 12:00 p/m
Updated 2023-03-20, 12:00 p/m
© Reuters.

© Reuters.

By Michael Elkins 

Morgan Stanley reiterated an Overweight rating and $220.00 price target on Tesla (NASDAQ:TSLA) as analysts believe that investors should anticipate further price cuts in EVs.

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

One of the reasons analysts believe prices will continue to drop is competition. If Tesla doesn’t cut prices, someone else will. Volkswagen (ETR:VOWG) just unveiled a concept iD2 with a targeted €20,000 (€1 = $1.0721) price point to be produced in a few years. Discussions with auto dealers suggest ‘sticker shock’ for new prices. As many legacy OEMs have abandoned entry-level ICE offerings, it’s up to cheaper EVs to fill the gap.

Falling lithium prices have also contributed to price cuts. Spot prices for China Lithium Carbonate (LCE) have fallen sharply to just below $40k/ton, as the latest data shows China battery production still significantly exceeds installations.

Recent events in the global banking world may also drive price reductions as tighter lending standards might have an adverse impact on financial institutions' willingness to fund car purchases at the margin.

“We are prepared for price cuts to be an established ‘feature’ of the global EV market,” write analysts. “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.”

Shares of TSLA are up 2.76% near mid-day trading on Monday.

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