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Tesla Inc. has calculated that it’s worthwhile to charge less for cars now so that it has a bigger base of customers willing to pay for software in the future, and one analyst is feeling more cautious about the stock after hearing that stance.
Truist Securities analyst William Stein downgraded Tesla’s stock
TSLA,
to hold from buy Friday, shortly after the company’s first-quarter earnings call revealed Chief Executive Elon Musk’s latest thinking on margins, which Stein described as a “brazen willingness” to put up with lower margins in pursuit of the company’s broader goals around autonomous driving.
“It’s better to ship a large number of cars at a lower margin, and subsequently, harvest that margin in the future as we perfect autonomy,” Musk said on the call.
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While Tesla’s various price reductions had been well publicized, thus making the company’s latest financials themselves not particularly shocking, the “big change” was “a surprising willingness to accept lower margins,” Stein wrote in his note to clients.
“The most surprising aspect of the qtr was Musk’s commentary suggesting the company would be willing to accept significantly lower automotive GPM [gross product margins], and even (perhaps theoretically) willing to break-even in automotive in order to expand TSLA’s installed base, into which the company can sell AI software like FSD,” he wrote, referring to what Tesla calls its Full Self-Driving capability.
The company’s “willingness to accept lower margins highlights the degree to which TSLA’s value is more tied to its AI initiatives,” but it “also diminishes the value of the
core automotive business,” in his view.
Stein slashed his price target on Tesla’s stock to $154 from $245 in his report.
Tesla’s appetite for near-term margin pain may not end up being quite as strong as Musk expressed on the earnings call, however, as Tesla subsequently boosted prices of its Model S and Model X vehicles, albeit to levels still below what was seen in early March.
Shares of Tesla were up 0.8% in Friday’s premarket action after suffering a 9.8% drop in Thursday’s session, the first after the electric vehicle company’s earnings report came out.
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