Tesla stock’s outlook could come down to ‘execution’ of EV delivery numbers: Analyst

RBC Capital Markets Lead Equity Analyst of Global Autos Tom Narayan discusses the outlook for Tesla stock amid price cuts, positioning in China’s EV market, and its delivery figures due out next week.

Video transcript

- Well, Tesla on track for its best first quarter performance ever as investors bet that recent price cuts are going to boost demand. But will Tesla live up to those expectations with its Q1 delivery and production numbers? We've got Tom Narayan, RBC's Global Autos. Analyst Tom, it's great to see you again. So the big question and Josh just alluded to it is whether or not those price cuts that we saw from Tesla if they worked, what do you think?

TOM NARAYAN: Yeah. We definitely think they're working. You're seeing it in the stock reaction today. We actually forecast a number of 445,000 units. So it's actually even better than that Bloomberg estimate you quoted 420,000. And we've actually tracked using the app download data which we've scraped, and that corroborates are finding. It looks like the price cuts are definitely working for these guys.

- So Tom, if they're working so well, should we expect more price cuts there then when we look out to the remainder of the year given the fact that consumer spending? We're starting to see some of a pullback and lots of questions just about what the economic picture is going to look like.

TOM NARAYAN: Yeah. It's like a chicken and egg thing. So if you're seeing that the demand is there and people are buying the cars, then you don't really need to cut prices as much. So maybe they did most of the price cutting already and they may not need to. If the demand wasn't coming, then maybe, yeah, maybe then they would have to cut pricing. It also depends on which region you're talking about. I think China is really where the price war is playing out. But they've held on to market share pretty well.

While a lot of other automakers incumbents are losing share, a lot of that is because of the price cutting. So as long as they can maintain or gain market share like they have been without cutting more pricing, maybe they don't need to. We forecast a 9% aggregate price cut throughout the year. And we've shown that actually even by doing that, profitability isn't really compromised as much as you would think.

- So Tom, we have certainly seen a very, very strong start to the year when it comes to Tesla, up nearly 70%. Has that jump been justified, do you think, and enough here to keep that momentum going?

TOM NARAYAN: Yeah. I mean, this is definitely that stock. A lot of people aren't really looking at Tesla and looking at its valuation, they're really looking at how it's performing and executing. As you guys noted, it's really comes down to deliveries and these delivery numbers to show that that the growth is really coming. But yeah, I mean, you can actually even so make a case for a valuation even in that case.

If you just look at Ferrari, a stock that trades at 25 times EBITDA which is our price target multiple for Tesla, you could get to a $223 price target. And you could arguably say that, yeah, Tesla is growing even faster than Ferrari at 1.8 million units from 1.2 potentially to 3 to 4 million units in the future. And its profit margins, we heard from the capital markets day, could explode by cutting costs by half.

So I think there is an argument you could make that the stock could run further. And it really comes down to execution, things like we're just noticing. We'll probably notice on Monday when we get the delivery numbers and when we anticipate to happen.

- Tom, there's a report out today that Elon Musk is planning a trip to China as early as next month. What's your gauge is in terms of what the demand picture looks like specifically in China? What do you think Tesla needs to do in order to further push into and gain even more market share there?

TOM NARAYAN: Yeah. The Chinese market is getting way more competitive especially from the domestic players. You're seeing a lot of market share gains from BYD for example. A lot of the incumbents like Volkswagen notably are losing share especially in the fully electric space. A lot of it comes to what the consumer wants in China and what they're demanding more and more especially in that mass market slightly below premium segment is connectivity and software.

This is where some of the incumbents are losing out, notably Volkswagen. But if you look at Tesla, that's where they shine. It's really on connectivity and software and they're gaining market share along with the Chinese domestic players while a lot of the other incumbents especially in this full electric space are losing share

- Tom, when you take a look at the EV pickup division right now, and I bring this up because Ford just yesterday saying that it's raising prices once again on its F-150 lightning. And lots of talk, lots of hype I should say about Ram debuting its EV pickup truck. We're getting more information on it next week at New York's Auto Show, what do you make of the competition right now within the pickup truck EV landscape and who do you think is going to come out on top?

TOM NARAYAN: Yeah, I think this topic gets a lot of attention for great reasons a lot of people want these vehicles. But if you really look at the pickup truck space, it is dominated by internal combustion vehicles, a lot of these are for small and medium-sized businesses. So I think it is getting a lot of attention. But really if you look at the penetration of the electric pickup trucks, it's de minimis. And in the US, electric penetration is going to take a long time to really go anywhere.

Yeah, you really have the big Detroit 3, they're all doing-- they're all going to have compelling products. Ford did launch its product earlier than everybody else. It's took an ICE car, its regular F-150 and made it electric. Whereas what Chevy and what Ram are going to do is really make a dedicated truck which will be a potentially more compelling. And then of course Ford will come out later with something that's competitive as well.

So I think all of these will be competitive products. But at the end of the day, these are-- I think it's a lot of headlines. Pickup truck electric penetration is going to be really low for a while. But yeah, maybe one day it'll be more significant but right now I think it's just getting a lot of attention in the news.

- All right. Tom Narayan, always great to get your perspective of RBC, thanks so much, have a good weekend.