Tesla's Cost Leadership & Vertical Integration Will Give it Advantage Over Peers in a Deflationary Environment, Says Morgan Stanley

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Tesla's TSLA cost leadership and vertical integration will give it an edge over peers in a deflationary environment, says Morgan Stanley. The firm reiterated the $330.00 price target for the company.

Morgan Stanley reiterated an Overweight rating and $330.00 price target for Tesla, despite believing the entire EV market could face downward pressure as EV demand slows, according to a report from the firm (via StreetInsider.com).

As EV demand slows, current spot LCE (Lithium Carbonate Equivalent) prices of $71,000 per tonne will face significant downward pressure throughout FY 2023, Morgan Stanley strategists say. But despite the risk of slowing demand, China is seeing a significant increase in battery inventories, above and beyond normal gaps between supply and demand. The growth could potentially aggravate a correction in LCE prices.

Analyst Adam Jonas wrote in a note, “Either EV demand needs to be revised down (at least in the near term) due to inflation and demand destruction, or key input prices such as Lithium/LCE need to fall to facilitate further and long overdue price cuts in EVs. We see EV price cuts as absolutely necessary to make good on investors’ long-term EV penetration forecasts in an increasingly saturated Chinese EV market, a structurally challenged European market, and a decelerating US economic environment.”

Jonas believes that Tesla's cost leadership and vertical integration may pad its relative advantage over peers in a deflationary environment. Tesla is now looking to vertically integrate into the lithium value chain. The company announced that it is building a battery-grade lithium hydroxide refining facility in Texas, where it has already been filed for a tax abatement. The company's goal is to bypass the bottlenecks in battery production that the industry has faced this year.

“We’ll do whatever we have to. Whatever the limiting factor is, we’ll do. We do not artificially constrain ourselves. We don’t vertically integrate just for the hell of vertically integrating,” Tesla CEO Elon Musk said during the Q3 2022 Earnings Call, in response to a question about whether the company is considering vertical integration into the mining industry.

© 2022, Eva Fox | Tesmanian. All rights reserved.

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