Tesla Inc (NASDAQ:TSLA)'s price cuts reflect Elon Musk’s strong preference for volume over margin ahead of a cyclical downturn in autos, according to analysts at Canaccord Genuity (TSX:CF, LSE:CF).
“We get it,” analysts wrote, pointing out that the EV manufacturer is in a unique position to “squeeze its growing EV competitors and seed the market with units that are forward upgradable with full self-driving (FSD) software.”
This software option (if purchased, not subscribed to) has the potential to double gross margins on the average Tesla vehicle immediately after purchase, the broker explained, describing it as a “razor/razorblade model.”
READ: Tesla stock sinks on another round of vehicle price cuts; analysts praise ‘strategic poker move’ as EV price war heats up
Canaccord estimated that in the third quarter Tesla made a gross profit of around US$15,000 per unit (including leases) with the FSD purchase option making a further US$15,000.
But with take-up rates for FSD in the mid-teens in the US and single teens globally “penetration has a lot of upside potential over time, particularly as the product improves” Canaccord estimated.
With price cuts making the Model 3 and Y mass-market vehicles, Tesla is in an enviable position competitively, in the broker’s opinion, particularly as it has made more of its vehicles eligible for the Inflation Reduction Act (IRA) related credits.
It noted that the rear-wheel drive Model 3 is now priced at $43,990 in the US, putting it at $36,490 after the IRA tax credit of $7,500.
Canaccord has adjusted its 2023 estimate for non-GAAP EPS to $3.99 from $5.00 and for 2024 from $8.51 to $7.99 but has increased the 2025 forecast from US$10.88 to US$11.12 to reflect improving volumes and profitability.
The broker reiterated its ‘Buy’ rating and its US$275 price target. Tesla shares closed at US$122.40 before the holiday weekend.
Contact Jeremy at jeremy@proactiveinvestors.com