Deutsche Bank views Tesla cuts as 'bold offensive move'; Reiterates buy

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By Michael Elkins

Deutsche Bank reiterated a Buy rating and $250.00 price target on Tesla (NASDAQ:TSLA) following a price cut by the automaker in a “bold offensive” move to bring costs below the IRS threshold and qualify for the $7,500 IRA EV tax credit. However, the unprecedented magnitude and global scope of the cuts clearly also reflect pressure on demand. Model prices in North America and Europe were slashed by 6-20% depending on the model.

Analysts wrote in a note, “Initial market reaction was to view this as a costly reactive move which will undoubtedly put considerable pressure on Tesla gross margins and earnings. Instead, we believe this likely is a bold offensive move, which secures Tesla’s volume growth, puts its traditional and EV competitors in great difficulty, and showcases Tesla’s considerable pricing power and cost superiority. Just as importantly, this could be the cut to end all cuts, helping reset Tesla’s 2023 estimates to a level where any further risk would be to the upside, and enabling investors to refocus on the considerable longer-term opportunity and next-gen platform, which will be presented at Tesla’s CMD on March 1.”

Deutsche Bank calculates that Tesla’s latest pricing cuts in the U.S. alone could cost the EV company about $7 billion in profit, which if they were entirely unexpected, could impact margin by 700bps and EPS by $1.70. The new cuts imply an ASP reduction of about 15% in aggregate on a company wide basis in 2023 vs. 2022. The analysts calculate this ASP reduction could pressurize 2023 vehicle gross margin by ~300bps vs. 2022 and leave 2023 EPS around ~$3.80. But the price cuts could also bring considerable positive margin offsets, from higher volume and better FSD take rates. If Tesla volume grows by 50% in 2023, EPS could be $4.15 vs. $3.95 estimated for 2022; at 60% volume growth, EPS could move to $4.50. Just as importantly, every 5% increase in global FSD take rate could boost gross margins by 70-80bps, helping EPS by another $0.20-0.25.

Shares of TSLA are down 2.73% in mid-day trading on Friday.