Tesla Price Cuts May Have Hurt Its Margin, Says Analyst: Why Investors Shouldn't Worry About It

Morgan Stanley, which recently dropped Tesla Inc. TSLA as its top U.S. automaker, continues to be bullish about the Elon Musk-led company.

The Tesla Analyst: Adam Jonas has an Overweight rating and $220 price target for Tesla shares.

The Tesla Thesis: The recent cuts in electric vehicles across industry participants are not a fad, but a trend, Jonas said in a note. Investors should expect further price cuts, with cost-leader Tesla setting the tone, he said.

See Also: Everything You Need To Know About Tesla Stock

Tesla’s price cuts, the analyst said, are a rational competitive behavior due to a host of factors that include:

• Its scale and cost leadership in the global EV market.
• It being the pioneer in setting industry standards for industrialization.
• Recovery in supply relative to demand.
• Falling lithium prices.
• Improving the affordability of cars.
• Competitive pressure.
• Slowing market growth and lending.
• Jonas noted that there is a gap in the market for $25,000 vehicles, with a sub-$400 monthly payment. Cheaper EVs have a scope, as many legacy automakers are abandoning entry-level ICE offerings, he said.

The analyst raised the specter of lower margins for the lower-priced vehicles but sees a longer-term payback on monetizing the installed base from recurring revenue from services, aftermarket, charging, software etc.

“As the supply/demand environment continues to change, we would prepare for potentially lower margins (at gross and OP) than consensus currently forecast for Tesla,” the analyst said. This, according to the analyst, could potentially drive more opportunistic entry points into the stock.

Morgan Stanley, however, said it believes Tesla’s EV competition, including both startups and legacy players, will continue to struggle to catch up, driving restructuring and consolidation across the EV landscape.

Price Action: Tesla closed Monday’s session 1.73% higher, at $183.25, according to Benzinga Pro data.

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