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Tesla is a clear winner in the industry shake-out thanks to cost and tech leadership, says UBS. The firm has lowered its PT but reiterated its Buy rating.
UBS released their Q4 preview for the companies they cover, titled “Price war starts unfolding.” Analysts wrote that they are cautious about all mass OEMs for the next couple of quarters. That being said, while they cut their EPS and PT for Tesla by ~40% to reflect aggressive price cuts, the firm sees the company as a clear winner of the industry shake-out thanks to cost and tech leadership and reiterated a Buy rating.
The firm wrote that globally, “Tesla's latest round of price cuts has put pressure on all competitors in the mass and premium-entry segment, both in EV and ICE. On the EV side, expect Tesla as a cost and technology leader (and the leading Chinese EV players) to continue expanding volumes aggressively, leveraging its superior cost structure overall legacy competitors and smaller EV players.” Analysts see it as the beginning of an industry-wide shakeout.
According to UBS, Tesla remains the undisputed global technology, scale, and cost leader in EVs, enabling the company to aggressively pursue a volume strategy in an increasingly oversupplied industry. The company has already reached a 1.8m annualized production capacity in Q4 2022. Capacity growth continues as Giga Berlin and Giga Texas keep ramping up, analysts emphasize.
The firm expects high price elasticity of demand in the segment of Model 3 and Model Y (which are likely to receive a refresh in the course of this year), enabling Tesla to grow volumes by c50% this year via price cuts. “Very few Chinese EV competitors are in the same cost territory as Tesla, we believe, whereas most OEMs will struggle to make profitable EVs at significantly lower price points. On top, Model 3 and Y prices now are at or below the price points of key ICE competing models (BMW X3, 3 series, etc.), so the addressable market is expanding fast,” the analysts emphasized.
UBS thinks price cuts will trigger a strong demand response, especially in the US, because Model Y is now below the $55,000 price cap and therefore eligible for the $7,500 tax credit. Analysts said that none of the global OEMs will be able to fully follow Tesla's pricing without dropping into loss-making territory for their competing EVs.
As a result of the lower ASP, the firm cut EPS by -39% to $3.06 2023E, fully diluted ($3.38 GAAP); UBS expects consensus to follow in the coming weeks after Q4 results. “While the 2023E PE remains high (around 40x), we would highlight the growth after 2023 driven by new product: Cybertruck (we think likely the most profitable electric pick-up truck in the market with most attractive price points to consumers), Semi Truck (which we view as the best electric class-8 truck in the market for many years to come), the new compact model (price point likely <$30k, potentially tripling Tesla's addressable market) on which we will likely hear more on the upcoming 1 March investor day,” analysts wrote.
The UBS DCF-based valuation now suggests a fair value of $220 per share instead of $350. This is driven by lower earnings and FCF forecasts from the firm, mainly on lower prices (but only on slightly lower volumes) than before. The bigger cuts (in %) are only relevant in the near term as a price normalization had already been expected in the coming years. Analysts reiterate a Buy rating and see Tesla as best positioned of the stocks they cover in the sector to be a relative winner in the likely upcoming industry shakeout.
H/t: @princeps73/Twitter
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