Tesla still the ‘category king’ in EVs, but beware shrinking margins: Analyst

Tesla (TSLA) shares have been rallying well into 2023, and it’s for all the right reasons, at least for investors who took a bath last year.

“Tesla is getting the right attention — you’ve seen the value come back into the stock that came out primarily because of Twitter,” said Craig Irwin of Roth Capital Partners.

Yes, Twitter. Though Tesla CEO (and current Twitter CEO) Elon Musk still has his hands tied with managing his latest purchase, Tesla bulls have been reassured lately that the company is back on the right path, following huge price cuts both here and abroad that have ginned up demand considerably for the pure-play EV-maker.

Tesla is still the “category king” in EVs as Irwin calls it, and the fact that its 2022 production forecast slipped to 1.4 million from a forecast 1.5 million is still pretty impressive, all things considered. Despite competition ramping up, Tesla is essentially the only automaker to achieve volume production of EVs.

But Irwin, who is overall bearish on Tesla, doesn’t see the recent good times lasting that long for shareholders.

“We see Tesla as a great company, but we think there’s going to be some [other] real winners. There are 100 or so EV models that are supposed to hit the road this year,” Irwin said.

In addition to more competition coming from the likes of Ford, GM and Kia, another big area that Irwin sees as threatening Tesla’s generous multiple is margin compression. Irwin sees it coming down by a drastic factor as the company introduces lower priced vehicles like the upcoming Gen 3 vehicle and sees more price-conscious buyers coming in due to those price cuts.

“So people that are buying on price cuts are not exactly prone to option things heavily, so you’re mixing towards a lower-margin crowd of buyers with an already margin direct price cut,” Irwin said. “So I think we’re probably looking towards more like 1,000 basis points in margin degradation over the next couple of quarters, instead of, basically, 500, 600, 700. That’s heavy pressure.”

In finance parlance, a 1,000 basis point cut is the equivalent of a whopping 10% hit to margins, meaning Tesla’s industry-best 20+% margins get taken down to Toyota levels of in the low teens. Irwin believes that kind of margin contraction means Tesla’s valuation needs to be taken down a peg or two.

“So, yes, it’s a growth stock. It’s valued like a growth stock, and they have got growth going again, and they deserve credit for that,” Irwin said. “But I think that they’re going to have a hard time really sustaining a multiple over the longer term, particularly given that the competition is looking very credible.”

Source: finance.yahoo.com