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Elon Musk is ‘definitely a core question’ to Tesla’s branding, production outlook: Analyst

Barclays Senior Autos Analyst Dan Levy explains Tesla's stock rating outlook ahead of the EV developer's first-quarter delivery figures, while also commenting on vehicle prices and headwinds stemming from CEO Elon Musk's involvement with Twitter.

Video Transcript

- A bullish call on the Street. Barclays reiterating its overweight rating on Tesla and $275 price target on the stock. Shares closing the day up just about 7/10 of a percent, just below 192 a share. We want to bring in the analyst behind that note Dan Levy, Barclays senior autos analyst. Dan, good to see you. So you think that stock still has significant room to rally. So what's the catalyst on the docket?

DAN LEVY: Hi. Thank you for having me, Sean and Dave. Yeah. The call into the deliveries result, which we expect probably over the weekend, is that they're probably going to exceed expectations. We're forecasting 425,000 units of volume ahead of consensus 420,000 units. A lot of that is pegged to some of the production commentary that they provided and some assumptions on how production fared in March and with the idea that inventory build is only going to be modest. And so we think that it could be a positive event and a positive catalyst for the stock, which has been under a little bit of negative sentiment lately given some questions on demand.


- You expect additional price cuts. What about impact on margins, Dan?

DAN LEVY: Yeah. It's a very relevant question. And it's I would say, for all automakers right now, the path to EV, you're dealing with two questions. One is the ramp on volume, but it's also a question on margins. But I think the key point for Tesla is that because they have such a significant cost lead, it's only natural that they're going to use or lean into their margin advantage or their cost lead to unlock further volume.

In fact, this was a key message that we got out of the investor day a few weeks ago. They are going to try to drive costs down. And with that, they will unlock further volume. So it's only natural that they're going to lean into the margins to unlock volume.

- So, Dan, how big of a boost do you think potential further price cuts are going to be with demand? I know you're expecting 425,000 units for deliveries in the first quarter. What does the second quarter then potentially look like?

DAN LEVY: There's going to be a ramp in volume going forward. And I think the key point I would make is that they are ramping on supply at some of their other facilities. So the question of price cuts, it is natural just given some of the economic pressures that we're seeing. And we're seeing this broadly in the US market. I mean, US pricing as a whole for the US industry is starting to come down off of all-time highs.

So Tesla is subject to the same sort of pricing dynamics that we see in the industry. On top of that, you also get some rampant volume at their new facilities, the facility in Austin, the facility in Berlin. As more supply comes online, it's only natural that they're probably going to cut prices somewhat to unlock that. I'll also point out that in the US specifically, first quarter, there was potentially some pull forward of demand given the dynamics of the IRA. This is the new legislation around the EV tax credit. And there was some temporary waiting period on when the full guidance is released.

So in that time, they got full credit. There was probably some pull forward of demand. Remains to be seen what happens. But they're going to have more supply hitting. There will probably be some other price cuts. But just remember, there is some offset on the margins given additional fixed cost absorption, and also as raw mats are starting to moderate somewhat.

- And, Dan, there's always the Elon factor. An interesting heat map climate poll of 1,000 Americans showed that 36% said Elon Musk makes them less likely to buy a Tesla. And then there's the always present Twitter overhang that had quieted for quite some time. And as you know, it feels like it's very much back in the news. Is Elon a positive for the overall branding of Tesla?

DAN LEVY: Listen, Elon is certainly a core question. I go back to the notion, though, that for all the questions on governance that we've seen-- and this was something that emerged late last year-- this is still a company that has a leading product, leading cost, and they're going to use that to ramp on volume. I think another message from the company also at the investor day-- the reason why they had by the end of the investor day 17 people on stage alongside Elon was to show the depth of their bench. So, yes, Elon is still a critical factor here. He is the one driving the vision. But I think the point is that there is more to Tesla than Elon.

- Yeah. We've just never seen, Dan, an automaker with a polarizing CEO. So it's unlike anything we've ever seen. In your sense, though, is he a pro? Is he a con?

DAN LEVY: Tesla would not have done what they've done without Elon. So I don't think they would have gotten to this place. And there's a very fascinating history of Tesla that there were a lot of decisions that many of us, myself included, questioned along the way. Look, Tesla would not have gotten to the point where they are taking some very unorthodox routes without Elon's guidance. So, yes, certainly I can appreciate the fact that there are some questions on how Elon may be perceived.

And the Twitter overhang was certainly a question. But I just go back to the product. It has a lead. They have a clear cost lead. I mean, Tesla is doing 17% EBIT margin last year. If you compare that to some of the other automakers, I mean, it's a clear lead over others. I'll just point out Ford, for instance, last week just reported that they had -40% EBIT margins on their EVs. And while this is going to narrow, it's going to be a long path. And that's not specific to Ford. I mean, we're seeing that with others as well. The path to EV profitability is not easy. So Tesla has a lead in this regard.

- Yeah. Certainly has first mover's advantage there, at least for now. Dan Levy, great to have you. Thanks so much.