Tesla Gets 'buy' Recommendation from Berenberg as Price Cuts Are 'investment in growth'

Berenberg upgraded Tesla to Buy from Hold due to “misguided pricing concerns.” The strategy of reducing prices is an investment in the future, says its analysts.

Berenberg said Tesla's price cuts are “an investment in growth” and reflect its cost leadership strategy. The company's new factories offer ample opportunity to increase efficiency, which is an excellent foundation.

“New plants offer a multi-year opportunity in capital and labor efficiency, as larger castings reduce robot counts and welding points,” the analysts wrote.

Berenberg also looked at ramping up production of the 4680 batteries, which would give Tesla additional economies of scale. While this remains a challenge, as company management said during the Q4 2022 Earnings Call, Tesla could eventually capture market share with gross margins in excess of 25%, according to the note.

“Moreover, we think that ramping up its battery cell production offers the company further economies of scale, although we understand that this remains challenging. Tesla, in our view, could take market share at a gross margin that exceeds 25%.”

Berenberg said that after a sharp price “blip” in 2023, it expects margins to recover as the manufacturing structure shifts from Fremont, California, to the company's other factories. The Fremont factory has high labor costs, inefficient floor layouts, and outdated equipment. At the same time, Giga Texas and Giga Berlin are Tesla's newest factories, which will be very efficient once fully launched.

“Tesla’s opportunistic post-pandemic price increases reached their limits through Q4 2022. Its rising production capacity into 2023 meant that Tesla was able to shift towards pricing its vehicles to drive volumes (sacrificing near-term margin), which positioned itself competitively against new EV launches. As Tesla’s Berlin and Austin plants ramp up, we expect production to replicate elements of Shanghai’s low-cost processes,” the analysts wrote in a client note.

The bank said it cut its estimates, cutting its 2023 earnings per share by 25% and cutting its price target to $200 from $255. However, it raised its recommendation. The firm expects the Tesla Investor Day on March 1 to be a short-term growth catalyst.

“Technical pressure from CEO Elon Musk's Twitter purchase and China disruption risks now appears loaded into the share price, while we think that Tesla's 1 March investor day offers near-term catalyst potential,” it said.

© 2023, Eva Fox | Tesmanian. All rights reserved.

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